Couple of days back, Tenzin asked me why Indian Rs. is depreciating with respect to US $ and not against the UK Pound that too when US is the center of the crisis. At that time, I tried my best to explain it to him whatever I know know!
Today while browsing, I got this audio link wherein Mr. Ajay Shah(one of my favorite blogger, whose blog I daily track) has given an interview to mint.
In that he has explained beautifully
1. how & why US $ is appreciating with respect to Indian Rs.
2. The role of the RBI in controlling the FOREX RATES.
3. Strengths of US & its economy with respect to Euro Zone, Japan & UK.
4. Implications of Rs. appreciation & depreciation.
5. Relation between Interest rates & their parity(Indian & US), capital flows, risk perception (VIX), global credit condition & Indian economy.
Here is the link for that audio...
http://www.livemint.com/2008/11/26184742/Just-to-Clarify-Episode-3.html
Friday, November 28, 2008
Mkts should have functioned today: Rakesh Jhunjhunwala (CNBC)
Actually, I thought of not to post anything today, but I couldn't resist! Here is what Rakesh Jhunjhunwala says...
Q: Is it the right thing to do to shut the markets in the light of what’s happened?
A: In the circumstances, you couldn’t function properly. So, given the choice it would have been better if it had been open.
Q: Do you think so?
A: During any terrorist operation, we have to indicate that we are working normally. We should not let terrorist activity affect us in any way. But now that it is closed, let us not discuss it.
Q: We have been getting several calls through the day about what the situation is and what is happening. Do you sense that this time around there is a more heightened sense of panic among traders, investors, and brokers?
A: I don’t have any sense of panic. I saw this during the 1993 blast. I was myself in the BSE then. As a nation, a killing of more than 100 people is not going to affect this country in any way. Having said that, we have to take steps to have better security and at least hang those people who attacked our Parliament.
As an Indian, I hang my head in shame that the Supreme Court has convicted the person who has attacked Parliament. But in this country, we don’t hang that person. We cannot take a lenient attitude toward terrorism. Having said that, I don’t think there is going to be any panic. If there is panic, it is going to be an opportunity to buy.
Q: Were you around that area last night?
A: I was in my office 10.15 pm yesteyday and couldn't get out, so ended up staying in office the entire night. It was happening next to my office and I could hear all the shooting. I could hear the blasts and the sound. But as a nation, we got to get together and face this. The first thing is that we have to show no sign of panic.
So let us send a message to the terrorists that do what you may but as a nation, we are not going to be affected. That is the best way to counter terrorism. If you allow them to affect us, they are successful. Do you think trade in India is going to stop, do you think commerce is going to stop? This is something that happened in London, Spain, and New York, and everybody bounced back.
Q: In the very near term, any concerns on ripple affects over the next few days because expiry has been postponed to tomorrow? Do you expect markets to be a bit uncertain while this whole process is underway?
A: It is difficult to predict but I would say that any fall in this market because of this attack is an opportunity. That is my personal view. The way the world market has rebounded, the Dow has gained continuously for four days, I am hopeful we will gain here also.
Q: Is it the right thing to do to shut the markets in the light of what’s happened?
A: In the circumstances, you couldn’t function properly. So, given the choice it would have been better if it had been open.
Q: Do you think so?
A: During any terrorist operation, we have to indicate that we are working normally. We should not let terrorist activity affect us in any way. But now that it is closed, let us not discuss it.
Q: We have been getting several calls through the day about what the situation is and what is happening. Do you sense that this time around there is a more heightened sense of panic among traders, investors, and brokers?
A: I don’t have any sense of panic. I saw this during the 1993 blast. I was myself in the BSE then. As a nation, a killing of more than 100 people is not going to affect this country in any way. Having said that, we have to take steps to have better security and at least hang those people who attacked our Parliament.
As an Indian, I hang my head in shame that the Supreme Court has convicted the person who has attacked Parliament. But in this country, we don’t hang that person. We cannot take a lenient attitude toward terrorism. Having said that, I don’t think there is going to be any panic. If there is panic, it is going to be an opportunity to buy.
Q: Were you around that area last night?
A: I was in my office 10.15 pm yesteyday and couldn't get out, so ended up staying in office the entire night. It was happening next to my office and I could hear all the shooting. I could hear the blasts and the sound. But as a nation, we got to get together and face this. The first thing is that we have to show no sign of panic.
So let us send a message to the terrorists that do what you may but as a nation, we are not going to be affected. That is the best way to counter terrorism. If you allow them to affect us, they are successful. Do you think trade in India is going to stop, do you think commerce is going to stop? This is something that happened in London, Spain, and New York, and everybody bounced back.
Q: In the very near term, any concerns on ripple affects over the next few days because expiry has been postponed to tomorrow? Do you expect markets to be a bit uncertain while this whole process is underway?
A: It is difficult to predict but I would say that any fall in this market because of this attack is an opportunity. That is my personal view. The way the world market has rebounded, the Dow has gained continuously for four days, I am hopeful we will gain here also.
Wednesday, November 26, 2008
India to recover fastest among global economies: CB Bhave
Many of my friends ask me whether the market still go down or when it start consolidating or start to surge? But being a newbie of just one year old how can I judge when people like our PM Mr. Manmohan Singh, and SEBI chairman C. B. Bhave are not able to say anything. Yes market is like that. Everyday we are facing some new crisis, new bailout, job cuts, recessions, drop in interest rates & etc. So nobody can predict the market movements in this kind of crisis time. So here is what Mr. Bhave is saying...
Let me begin with the problems that the world is facing today. In August 2007, the United States (US) and the European markets had discovered that their financial institutions were carrying on their books assets which came to be known as sub-prime assets of which they had no idea of how to value.
The whole thing came up when one of the banks in its quarterly report said, “I do not know how to value my book.”
That created a fear in investor’s minds that all these balance sheets and profit and loss accounts may just be a story and which required more reading into. They feared these numbers did not reflect the actual state of affairs.
After August 2007, till January 2008 Indian market kept booming. So a theory developed around that time that we were decoupled from the Western economies and India was relatively in isolation and would charter its own cost.
Our focus of attention was essentially on the stock markets. Then the market had some shocks in January then saw some recovery and in subsequent months saw a fall again and so on. Till September 15, when one of the biggest US financial institution, Lehman Brothers was allowed to go bankrupt, we had not realized how closely linked with the world we were.
Even on September 15 Indian did not realize the profound effect it would have on the economy. Interestingly even the Western regulators did not see this recession.
This effect was not on the stock markets, the effect was on the credit markets.
One of the things we probably missed out is the importance of credit markets in the world.
As Lehman went down – there was already this fear for a period of one year in the minds of investors of whether balance sheets portrayed a true picture of the bank properly or not. Then, another peculiar thing happened i.e. institutions stopped trusting each other.
So if a bank doesn’t trust another bank then credit markets cannot function and if credit markets don’t function then trade and commerce is impossible.
It took us about 15-20 days to realize how closely interlinked with the world we were through the credit markets because our trade credit got affected, some of the companies were raising even their working capital requirements on the international markets. We started having the phenomena of these companies wanting to raise the same money in the Indian markets and we had a huge liquidity squeeze and two shocks in October when we went through a liquidity squeeze.
This resulted in an impact on the mutual fund industry because all corporates then wanted to withdraw from the liquid schemes of mutual funds.
The mutual funds in turn found that their underlying assets had no markets because nobody had money, so nobody was going to buy these assets. So we had to take some emergency action. The basic point I want to make here is that we are very closely interlinked with the world even though we are not a capital account convertible country and therefore the capital linkage is not so much but the linkage through trade is tremendous.
Since short-term capital got affected in this manner and credit market seized, the question for us to ask is why did something similar not happened in the equity markets? Why did people not lose faith in each other and why did they not stop transacting? The answer takes us back to the question that probably equity markets are organized far better.
These are exchange traded markets and these markets have what all called clearing entities. These clearing entities take the counter party risks.
Therefore when a broker puts a trade on a stock exchange, he does not worry as to who the counterparty broker is. He knows that at the end of that day, the clearing corporation is my counterparty and that clearing corporation holds enough money by way of margins and a guarantee fund to be able to complete that transaction.
It is through building this infrastructure, these clearing corporations didn’t exist in our markets ten years ago, it is in the last ten years that this country has acidulously built these clearing corporations, the regulator has required and the market has responded by adequately creating big enough settlement guarantee funds and the ability to give this counterparty guarantee a margin mechanism which hasn’t failed despite the fact that more than 50% of the index is off.
The point I want to make with reference to this crisis is that this is an opportunity for us to study what went wrong not because we want to pin the blame on X, Y or Z or be happy that some developed markets made mistakes and we are great. But to study this phenomenon in order to learn as to what do we need to do when we become as big as them. Do we have the institutional capacity to handle these things and if we don’t what efforts do we need to make?
The bank said ‘I do not know how to value the assets in my book’. So when there are over-the-counter trades as opposed to exchange trades, prices are not transparent and when prices are not transparent, it is not possible to create a clearing agency which will clear this trades with the guarantee that irrespective of who your counter party is I will put this trade through.
So to my mind our effort as regulators, as systems, as market player should be to see that we take as many financial products as possible on to an exchange traded market.
One of the small beginnings that we have made in this direction is to bring currency futures on to the exchange traded platform.
As far as what investors need to do in such markets; the first principle of markets is that if they are really true markets then nobody can predict how low or how high these markets will go. So if somebody tells you that I always knew that this market will go up to 21,000 in the month of January and thereafter fall then he is only being wise after the event.
If he was asked in January whether this will happen, he wouldn’t have been able to predict. If you ask him today how low the market is going to go and when and when will it start rising, again we do not have an answer. Many times we tend to forget this.
Nobody can predict whether the market will go up or down tomorrow.
So, in short, equity investment is a risky investment. When you say that this is risky investment, what is the first thing you do as an investor? The first thing is, please do not put all your savings into the equity market.
Since you do not know when it going to go up or go down, you also cannot time the market. So, that means do not put that money that might be required by you for an emergency, because if you put that money into this market, you might have to withdraw it at a wrong point from your perspective. You might have to book losses and withdraw that money.
Last but not the least, do not leverage yourself and invest into the market. This is precisely what happens when the market is going up. When the market is going up and we see it going up every day for months together, we think that it is a one-way bet.
If I bet Rs 10 on this market, in one-month I’ll get Rs 11. That sounds like a fantastic return. I have Rs 10 in my pocket. But then I see, if I borrow Rs 90 more and put Rs 100 in this market that would be even more fantastic returns. I’ll earn Rs 10. So, on my Rs 10 I have a return of Rs 10. I would be a very wise person.
But you forget in the process of leveraging that if you had a loss of Rs 10, then your entire contribution is wiped out. The remaining Rs 90 would have to be returned to the person who lent you that money. This is not just for retail investors. Retail investors should certainly not do it. But even institutions should not get into this. That is the second lesson we have learnt from what happened in the western markets.
You must have read that the five biggest firms in the US went in 2004 to the Securities and Exchange Commission (SEC) and asked the committee to relax the net capital rule for them because they are big institutions. They said they knew how to conduct our risk management practices. The Commission was convinced and it made an exception in the case of these firms. Those firms took their leveraging to 1:30. Now we are being told that the deleveraging process is on and therefore money is being withdrawn from global markets and not just our markets.
So, leveraging is a very dangerous thing. Trade and commerce cannot run unless you leverage yourself. So, the trick is in balancing.
Every crisis is an opportunity. We have learnt a lot during the month of October. We should use this opportunity to improve our system. When the chips are down, we must build for the future, and not just be unhappy that the chips are down, because this country will recover most probably amongst the fastest in the world. We will feel the effect of what is going on in the world but we will be amongst the first few that recover. When we do recover, our weight in the world will be more than what it was before the crisis.
Let me begin with the problems that the world is facing today. In August 2007, the United States (US) and the European markets had discovered that their financial institutions were carrying on their books assets which came to be known as sub-prime assets of which they had no idea of how to value.
The whole thing came up when one of the banks in its quarterly report said, “I do not know how to value my book.”
That created a fear in investor’s minds that all these balance sheets and profit and loss accounts may just be a story and which required more reading into. They feared these numbers did not reflect the actual state of affairs.
After August 2007, till January 2008 Indian market kept booming. So a theory developed around that time that we were decoupled from the Western economies and India was relatively in isolation and would charter its own cost.
Our focus of attention was essentially on the stock markets. Then the market had some shocks in January then saw some recovery and in subsequent months saw a fall again and so on. Till September 15, when one of the biggest US financial institution, Lehman Brothers was allowed to go bankrupt, we had not realized how closely linked with the world we were.
Even on September 15 Indian did not realize the profound effect it would have on the economy. Interestingly even the Western regulators did not see this recession.
This effect was not on the stock markets, the effect was on the credit markets.
One of the things we probably missed out is the importance of credit markets in the world.
As Lehman went down – there was already this fear for a period of one year in the minds of investors of whether balance sheets portrayed a true picture of the bank properly or not. Then, another peculiar thing happened i.e. institutions stopped trusting each other.
So if a bank doesn’t trust another bank then credit markets cannot function and if credit markets don’t function then trade and commerce is impossible.
It took us about 15-20 days to realize how closely interlinked with the world we were through the credit markets because our trade credit got affected, some of the companies were raising even their working capital requirements on the international markets. We started having the phenomena of these companies wanting to raise the same money in the Indian markets and we had a huge liquidity squeeze and two shocks in October when we went through a liquidity squeeze.
This resulted in an impact on the mutual fund industry because all corporates then wanted to withdraw from the liquid schemes of mutual funds.
The mutual funds in turn found that their underlying assets had no markets because nobody had money, so nobody was going to buy these assets. So we had to take some emergency action. The basic point I want to make here is that we are very closely interlinked with the world even though we are not a capital account convertible country and therefore the capital linkage is not so much but the linkage through trade is tremendous.
Since short-term capital got affected in this manner and credit market seized, the question for us to ask is why did something similar not happened in the equity markets? Why did people not lose faith in each other and why did they not stop transacting? The answer takes us back to the question that probably equity markets are organized far better.
These are exchange traded markets and these markets have what all called clearing entities. These clearing entities take the counter party risks.
Therefore when a broker puts a trade on a stock exchange, he does not worry as to who the counterparty broker is. He knows that at the end of that day, the clearing corporation is my counterparty and that clearing corporation holds enough money by way of margins and a guarantee fund to be able to complete that transaction.
It is through building this infrastructure, these clearing corporations didn’t exist in our markets ten years ago, it is in the last ten years that this country has acidulously built these clearing corporations, the regulator has required and the market has responded by adequately creating big enough settlement guarantee funds and the ability to give this counterparty guarantee a margin mechanism which hasn’t failed despite the fact that more than 50% of the index is off.
The point I want to make with reference to this crisis is that this is an opportunity for us to study what went wrong not because we want to pin the blame on X, Y or Z or be happy that some developed markets made mistakes and we are great. But to study this phenomenon in order to learn as to what do we need to do when we become as big as them. Do we have the institutional capacity to handle these things and if we don’t what efforts do we need to make?
The bank said ‘I do not know how to value the assets in my book’. So when there are over-the-counter trades as opposed to exchange trades, prices are not transparent and when prices are not transparent, it is not possible to create a clearing agency which will clear this trades with the guarantee that irrespective of who your counter party is I will put this trade through.
So to my mind our effort as regulators, as systems, as market player should be to see that we take as many financial products as possible on to an exchange traded market.
One of the small beginnings that we have made in this direction is to bring currency futures on to the exchange traded platform.
As far as what investors need to do in such markets; the first principle of markets is that if they are really true markets then nobody can predict how low or how high these markets will go. So if somebody tells you that I always knew that this market will go up to 21,000 in the month of January and thereafter fall then he is only being wise after the event.
If he was asked in January whether this will happen, he wouldn’t have been able to predict. If you ask him today how low the market is going to go and when and when will it start rising, again we do not have an answer. Many times we tend to forget this.
Nobody can predict whether the market will go up or down tomorrow.
So, in short, equity investment is a risky investment. When you say that this is risky investment, what is the first thing you do as an investor? The first thing is, please do not put all your savings into the equity market.
Since you do not know when it going to go up or go down, you also cannot time the market. So, that means do not put that money that might be required by you for an emergency, because if you put that money into this market, you might have to withdraw it at a wrong point from your perspective. You might have to book losses and withdraw that money.
Last but not the least, do not leverage yourself and invest into the market. This is precisely what happens when the market is going up. When the market is going up and we see it going up every day for months together, we think that it is a one-way bet.
If I bet Rs 10 on this market, in one-month I’ll get Rs 11. That sounds like a fantastic return. I have Rs 10 in my pocket. But then I see, if I borrow Rs 90 more and put Rs 100 in this market that would be even more fantastic returns. I’ll earn Rs 10. So, on my Rs 10 I have a return of Rs 10. I would be a very wise person.
But you forget in the process of leveraging that if you had a loss of Rs 10, then your entire contribution is wiped out. The remaining Rs 90 would have to be returned to the person who lent you that money. This is not just for retail investors. Retail investors should certainly not do it. But even institutions should not get into this. That is the second lesson we have learnt from what happened in the western markets.
You must have read that the five biggest firms in the US went in 2004 to the Securities and Exchange Commission (SEC) and asked the committee to relax the net capital rule for them because they are big institutions. They said they knew how to conduct our risk management practices. The Commission was convinced and it made an exception in the case of these firms. Those firms took their leveraging to 1:30. Now we are being told that the deleveraging process is on and therefore money is being withdrawn from global markets and not just our markets.
So, leveraging is a very dangerous thing. Trade and commerce cannot run unless you leverage yourself. So, the trick is in balancing.
Every crisis is an opportunity. We have learnt a lot during the month of October. We should use this opportunity to improve our system. When the chips are down, we must build for the future, and not just be unhappy that the chips are down, because this country will recover most probably amongst the fastest in the world. We will feel the effect of what is going on in the world but we will be amongst the first few that recover. When we do recover, our weight in the world will be more than what it was before the crisis.
How the Financial Crisis Was Built Into the System - Robert Kiyosaki
How did we get into the current financial mess? Great question.
Turmoil in the Making
In 1910, seven men held a secret meeting on Jekyll Island off the coast of Georgia. It's estimated that those seven men represented one-sixth of the world's wealth. Six were Americans representing J.P. Morgan, John D. Rockefeller, and the U.S. government. One was a European representing the Rothschilds and Warburgs.
In 1913, the U.S. Federal Reserve Bank was created as a direct result of that secret meeting. Interestingly, the U.S. Federal Reserve Bank isn't federal, there are no reserves, and it's not a bank. Those seven men, some American and some European, created this new entity, commonly referred to as the Fed, to take control of the banking system and the money supply of the United States.
In 1944, a meeting in Bretton Woods, N.H., led to the creation of the International Monetary Fund and the World Bank. While the stated purposes for the two new organizations initially sounded admirable, the IMF and the World Bank were created to do to the world what the Federal Reserve Bank does to the United States.
In 1971, President Richard Nixon signed an executive order declaring that the United States no longer had to redeem its paper dollars for gold. With that, the first phase of the takeover of the world banking system and money supply was complete.
In 2008, the world is in economic turmoil. The rich are getting richer, but most people are becoming poorer. Much of this turmoil is directly related to those meetings that took place decades ago. In other words, much of this turmoil is by design.
Power and Domination
Some people say these events are part of a grand conspiracy, and that might well be. Some people say they represent the struggle between capitalists, communists and socialists, and that might be, too.
I personally don't participate in the debate over a possible global conspiracy; it's a waste of time. To me, the wider struggle is for power and domination. And while this struggle has done a lot of good — and a lot of bad — I just want to know how to avoid becoming its victim. I see no reason to be a mouse trying to stop a herd of elephants from fighting.
Currently, many people are suffering due to high oil price, the slowdown in the economy, loss of jobs, declines in home values, increased bankruptcies and businesses closings, savings being wiped out, the plummeting stock market, and rising inflation. These realities are all direct results of this financial power struggle, and millions of people are its victims today.
Many Problems, Few Solutions
There are three major problems with the events of 1913, 1944, and 1971. The first is that the Fed, the World Bank, and the IMF are allowed to create money out of nothing. This is the primary cause of global inflation. Global inflation devalues our work and our savings by raising the prices of necessities.
For example, when gas prices soared, many people said that the price of oil was going up. In reality, the main cause of the high price of oil is the decreasing value of the dollar. The Fed, the World Bank, and the IMF, like Zimbabwe, are mass-producing funny money, thereby increasing prices and devaluing our quality of life.
The second problem is that our economic crises are getting bigger. In the 1970s, the Fed faced and solved million-dollar crises. In the 1980s, it was billion-dollar crises. Today, we have trillion-dollar crises. Unfortunately, these bigger crises mean more funny money entering the system.
Apocalypse Soon
The third problem is that in 1913, the Fed only protected the large commercial banks such as Bank of America. After 1944, the Fed, the World Bank, and the IMF began bailing out Third World nations such as Tanzania and Mexico. Then, in 2008, the Fed began bailing out investment banks such as Bear Sterns, and its role in the Fannie Mae and Freddie Mac debacle is well known. By 2020, the biggest of bailout of all will probably occur: Social Security and Medicare, which will cost at least a $100 trillion.
Even if we find more oil and produce more food, prices will continue to rise because the value of the dollar will continue to decline. The dollar has lost over 90 percent of its value since the Fed was created. The U.S. dollar will continue to decline because of those seven men on Jekyll Island in 1910.
Granted, the funny-money system has done a lot of good — it has improved the world and made a lot of people rich. But it's also done a lot of bad. I believe somewhere between today and 2020, the system will break. We're on the eve of financial destruction, and that's why it's in gold I trust. I'd rather be a victor than a victim.
Turmoil in the Making
In 1910, seven men held a secret meeting on Jekyll Island off the coast of Georgia. It's estimated that those seven men represented one-sixth of the world's wealth. Six were Americans representing J.P. Morgan, John D. Rockefeller, and the U.S. government. One was a European representing the Rothschilds and Warburgs.
In 1913, the U.S. Federal Reserve Bank was created as a direct result of that secret meeting. Interestingly, the U.S. Federal Reserve Bank isn't federal, there are no reserves, and it's not a bank. Those seven men, some American and some European, created this new entity, commonly referred to as the Fed, to take control of the banking system and the money supply of the United States.
In 1944, a meeting in Bretton Woods, N.H., led to the creation of the International Monetary Fund and the World Bank. While the stated purposes for the two new organizations initially sounded admirable, the IMF and the World Bank were created to do to the world what the Federal Reserve Bank does to the United States.
In 1971, President Richard Nixon signed an executive order declaring that the United States no longer had to redeem its paper dollars for gold. With that, the first phase of the takeover of the world banking system and money supply was complete.
In 2008, the world is in economic turmoil. The rich are getting richer, but most people are becoming poorer. Much of this turmoil is directly related to those meetings that took place decades ago. In other words, much of this turmoil is by design.
Power and Domination
Some people say these events are part of a grand conspiracy, and that might well be. Some people say they represent the struggle between capitalists, communists and socialists, and that might be, too.
I personally don't participate in the debate over a possible global conspiracy; it's a waste of time. To me, the wider struggle is for power and domination. And while this struggle has done a lot of good — and a lot of bad — I just want to know how to avoid becoming its victim. I see no reason to be a mouse trying to stop a herd of elephants from fighting.
Currently, many people are suffering due to high oil price, the slowdown in the economy, loss of jobs, declines in home values, increased bankruptcies and businesses closings, savings being wiped out, the plummeting stock market, and rising inflation. These realities are all direct results of this financial power struggle, and millions of people are its victims today.
Many Problems, Few Solutions
There are three major problems with the events of 1913, 1944, and 1971. The first is that the Fed, the World Bank, and the IMF are allowed to create money out of nothing. This is the primary cause of global inflation. Global inflation devalues our work and our savings by raising the prices of necessities.
For example, when gas prices soared, many people said that the price of oil was going up. In reality, the main cause of the high price of oil is the decreasing value of the dollar. The Fed, the World Bank, and the IMF, like Zimbabwe, are mass-producing funny money, thereby increasing prices and devaluing our quality of life.
The second problem is that our economic crises are getting bigger. In the 1970s, the Fed faced and solved million-dollar crises. In the 1980s, it was billion-dollar crises. Today, we have trillion-dollar crises. Unfortunately, these bigger crises mean more funny money entering the system.
Apocalypse Soon
The third problem is that in 1913, the Fed only protected the large commercial banks such as Bank of America. After 1944, the Fed, the World Bank, and the IMF began bailing out Third World nations such as Tanzania and Mexico. Then, in 2008, the Fed began bailing out investment banks such as Bear Sterns, and its role in the Fannie Mae and Freddie Mac debacle is well known. By 2020, the biggest of bailout of all will probably occur: Social Security and Medicare, which will cost at least a $100 trillion.
Even if we find more oil and produce more food, prices will continue to rise because the value of the dollar will continue to decline. The dollar has lost over 90 percent of its value since the Fed was created. The U.S. dollar will continue to decline because of those seven men on Jekyll Island in 1910.
Granted, the funny-money system has done a lot of good — it has improved the world and made a lot of people rich. But it's also done a lot of bad. I believe somewhere between today and 2020, the system will break. We're on the eve of financial destruction, and that's why it's in gold I trust. I'd rather be a victor than a victim.
Tuesday, November 25, 2008
Bankruptcy
In the time crisis like present condition & great depression of 1929, the common words we come across are Bankruptcies & Bailouts. Till now in US 23 banks collapsed including CITI which is bailed out by US government. Guys do you know in GREAT DEPRESSION time total of 9000 banks bankrupted...
So today I am posting something very brief intro about Bankruptcy related stuff regarding US laws...
Bankruptcy is a proceeding in a federal court in which an insolvent debtor's assets are liquidated and the debtor is relieved of further liability.
This basically means that a person (or a corporation) was so far in debt that they felt a fresh start was their only option.
There are three types of bankruptcies:
Chapter 7:
All assets are liquidated, except those that are exempt in your state (possibly a home, car, clothing, household appliances, life insurance, pension, and work-related tools). This property is sold by a court-appointed official or given to creditors.
Chapter 11:
Intended largely for businesses. Designed to allow a business to continue operating while repaying creditors through a court-approved plan.
Chapter 13:
If you have unsecured debts of less than $269,250 and secured debts of less than $871,551, you may be entitled to this type of bankruptcy protection, which allows you to keep certain property while you pay off your debts under the supervision of a court-appointed trustee.
All three types of bankruptcy may get rid of unsecured debts (those where creditors have no rights to specific property) and stop foreclosures, repossessions, garnishment of wages, utility service cancellations and activities of debt collectors against you. Chapter 7 and 13 bankruptcies provide exemptions that allow you to keep certain assets, though those exemption amounts vary greatly from state to state.
On the downside, it's not a "get out of debt free" card. Here are some of the disadvantages of declaring bankruptcy:
You need to file the claim and pay a fee. You may also need to pay a bankruptcy lawyer, and it can be difficult to find a good one, since some try to maximize their profits by handling cases as quickly as possible instead of giving your bankruptcy the attention it deserves.
Some debts cannot be eliminated by declaring bankruptcy, including taxes, student loans, alimony, child support, debts that resulted from fraud or willful injury and some property settlements, fines and penalties.
Your bankruptcy will remain on your record for up to ten years. This may make it difficult or impossible to obtain a credit card or a loan.
For these reasons, bankruptcy should be used only when there's no other solution . However, the law forbids discrimination against those who have filed for bankruptcy, so you cannot be denied a job, public housing or a driver's license on this basis.
Source... Investorguide.com
So today I am posting something very brief intro about Bankruptcy related stuff regarding US laws...
Bankruptcy is a proceeding in a federal court in which an insolvent debtor's assets are liquidated and the debtor is relieved of further liability.
This basically means that a person (or a corporation) was so far in debt that they felt a fresh start was their only option.
There are three types of bankruptcies:
Chapter 7:
All assets are liquidated, except those that are exempt in your state (possibly a home, car, clothing, household appliances, life insurance, pension, and work-related tools). This property is sold by a court-appointed official or given to creditors.
Chapter 11:
Intended largely for businesses. Designed to allow a business to continue operating while repaying creditors through a court-approved plan.
Chapter 13:
If you have unsecured debts of less than $269,250 and secured debts of less than $871,551, you may be entitled to this type of bankruptcy protection, which allows you to keep certain property while you pay off your debts under the supervision of a court-appointed trustee.
All three types of bankruptcy may get rid of unsecured debts (those where creditors have no rights to specific property) and stop foreclosures, repossessions, garnishment of wages, utility service cancellations and activities of debt collectors against you. Chapter 7 and 13 bankruptcies provide exemptions that allow you to keep certain assets, though those exemption amounts vary greatly from state to state.
On the downside, it's not a "get out of debt free" card. Here are some of the disadvantages of declaring bankruptcy:
You need to file the claim and pay a fee. You may also need to pay a bankruptcy lawyer, and it can be difficult to find a good one, since some try to maximize their profits by handling cases as quickly as possible instead of giving your bankruptcy the attention it deserves.
Some debts cannot be eliminated by declaring bankruptcy, including taxes, student loans, alimony, child support, debts that resulted from fraud or willful injury and some property settlements, fines and penalties.
Your bankruptcy will remain on your record for up to ten years. This may make it difficult or impossible to obtain a credit card or a loan.
For these reasons, bankruptcy should be used only when there's no other solution . However, the law forbids discrimination against those who have filed for bankruptcy, so you cannot be denied a job, public housing or a driver's license on this basis.
Source... Investorguide.com
Monday, November 24, 2008
A bankruptcy to Save GM - Joshua Rauh (Professor, University of Chicago Booth School of Business) & Luigi Zingales (Professor, University of Chicago)
Not long ago, Alitalia was one of the largest airline companies in the world. Today it is a shadow of its former self, having burned massive amounts of taxpayer money before finally entering bankruptcy with few assets remaining. The principal culprit of this debacle was the Italian government. Trying to avoid the political pain a bankruptcy would have caused, the government continued providing subsidised financing to the money-losing airline, delaying the necessary restructuring. Not only was a gigantic waste of taxpayers’ money, but it was a death sentence for the very company it wanted to save. Postponing the day of reckoning weakened Alitalia’s competitive position, making it lose market share it will never regain as a reorganised company.
GM is broke, how to fix it?
General Motors is quickly going down the same path. There is no doubt that it needs a serious restructuring. It burned through $9 billion of cash in the first 9 months of 2008. It has a labor cost 50% higher than U.S.-based Toyota plants, and it produces cars nobody wants. It is saddled with massive pension and healthcare obligations and it is essentially insolvent: its total liabilities are more than 50% greater than the book value of its assets.
Critically, GM’s position on the verge of bankruptcy is not because of the severity of the current financial and economic crisis. The current crisis is simply the proverbial straw that breaks the camel’s back. Without the crisis, the camel would not have lasted long anyway.
Bailout: Cash for a drug addict
If the US government provides GM with a $25 billion loan that allows it to continue operating under current conditions for another year or two, the money would simply be wasted and the problem postponed. GM would still be completely unable to survive in the long term. We are very sympathetic towards the pain of the hundreds of thousands of workers whose jobs are at stake. It is precisely because we are concerned about their long term welfare that we oppose a bailout. Throwing money at a drug addict only enables the addict to continue abusing drugs and ultimately shortens his life. Similarly, government money aimed at a company that needs restructuring enables it to avoid taking responsibility of its future, condemning it to a certain death.
A debt for equity swap won’t work
Unfortunately, in this case the transformation of part of the debt into equity, as proposed by one of us for banks, is not a solution either. GM’s problem is not a short-term liquidity crisis. A debt-for-equity swap would provide temporary relief from GM’s short term obligations, but at the cost of continuing the bleeding and delaying the restructuring. GM would just continue to run down the value of its assets. The only difference with respect to a government bailout would be that investor money instead of taxpayer money would be wasted.
Chapter 11 is the way forward
We believe that a Chapter 11 bankruptcy filing for GM is the only possible solution. However, we recognise that in the current environment, there are several likely inefficiencies associated with the bankruptcy process. In particular, if we do nothing and wait for GM to file for bankruptcy, which would likely happen in a month or so, we would risk a bad outcome of the proceedings, namely an inefficient liquidation of the company and a substantial amount of social disruption from the sudden loss of jobs. We therefore propose that the government oversee a prepackaged bankruptcy for GM that would give the company the restructuring it badly needs and avoid inefficient liquidation. To be successful, this restructuring requires several elements.
Beware Chapter 11 without DIP financing
First, financing must be available during the restructuring. In normal times, this debtor-in-possession (DIP) financing would typically be provided by financial institutions. However, obtaining DIP in the current environment is a risky business. The market for the provision of DIP is dominated by a few players, and it is not clear how many of them are willing to lend now. JP Morgan, for instance, has several billion of DIP financing tied up with Delphi, GM’s main supplier of parts, which has been in bankruptcy since 2005. It is doubtful that JP Morgan will be willing or able to double up its exposure to the automobile industry. At the same time, GE Capital and Citigroup, who provided the DIP finance for the Chapter 11 bankruptcy of United Airlines, are unlikely to become the financiers of GM because they have problems of their own.
In this case, given the frictions on the credit market, it would be justified for the government to provide DIP financing. This loan would be very different from the one proposed by GM executives and unions. By being senior to all the existing debt it would be relatively safe for the government.
Energising restructuring
Second, the financing must aim to minimise the risk the company remains passive and continues wasting resources. A cautionary tale is found in the DIP financing of Eastern Airlines, which kept flying in bankruptcy until the value of its assets had been driven almost to zero. To avoid this problem, we propose that while the government provides the funding for the loans and the guarantee for most of the losses, the actual lending decision should be made by a commercial bank. In exchange for the underwriting fees, the private bank could be held liable for some percentage of the last losses on the value of GM’s debt. In this way, we impose a limit on GM’s ability to waste resources. When the value of its assets has been impaired, GM will be unable to get any new financing, because the private institutions will pull the plug. In this way we avoid the risk that GM will die of premature death in Chapter 11, but we also prevent GM from exploiting the government guarantee to delay the restructuring.
Third, the GM bankruptcy must avoid setting off a costly chain reaction of other bankruptcies. In particular, the bankruptcy of related suppliers must be avoided. If GM were to default on its payments to these suppliers, many of them would be broke, with negative consequences for the other manufacturers of cars in the United States. DIP financing must therefore be sufficient to allow GM to make its payments to suppliers. Furthermore, bankruptcies of foreign subsidiaries should also be avoided. As the Lehman bankruptcy has shown, foreign proceedings are more rigid and would contribute to the possibility of excessive liquidation.
Fourth, GM must emerge from Chapter 11 as a smaller company. This necessitates shutting down the most money-losing segments of the company, while also providing incentives to foreign manufacturers to buy some of GM’s assets without union contracts attached.
Fifth, GM must emerge from Chapter 11 without massive pension obligations. Legally, the US government is on the hook for any underfunding of accrued pension benefits for US workers, with a cap of $51,750 per person year. Much of the unloading of GM’s pension will therefore happen mechanically and unfortunately will come at a substantial cost to taxpayers. As showed by the United Airlines bankruptcy, it is impossible to know exactly what the magnitude of the government liability will be before the bankruptcy itself happens, due to uncertainty about the value of the assets and also the fact that the government turns the pension liability into a hard riskless claim. Our best estimate is that the underfunded US pensions themselves could cost taxpayers $23 billion. The alternative, however, is worse: to waste money propping up GM and hope that the government pension liability shrinks going forward through a miraculous performance of GM’s pension fund (and risking it might get even larger).
Sixth, GM must emerge from Chapter 11 without enormous retiree medical care liabilities. By negotiating with its white-collar employees, GM has been able to get the unfunded part of this liability down to a “mere” $34 billion. Furthermore, GM and the United Auto Workers (UAW) have agreed to a special fund for a Voluntary Employee Beneficiaries Association (VEBA). Under this agreement, however, billions of dollars of additional cash contributions are due from GM in the next several years. The agreement will have to be revisited in Chapter 11. We recommend that some of the liability be funded with shares in the reorganised company. This is how United Airlines pilots were compensated for some of their losses from uncovered pension benefits in the UAL bankruptcy.
Assuring consumers: Insuring warranties
Finally, the bankruptcy plan would have to address perhaps the biggest challenge of a Chapter 11 filing: the risk that the customers will desert GM because of concerns about the value of its car warranties. People were not afraid to fly United Airlines when it was in Chapter 11. However, a trip is a relatively short-lived transaction and a customer does not care about the fate of the airline once he has arrived home. With cars, the fear of losing the warranty might be large enough that the potential customers will shy away. Even worse, this fear might become self-fulfilling: if enough customers avoid GM, the survival of the company is at risk.
To avoid this problem, we propose that GM be required to purchase insurance for its warrantees, and to do so in such a way that its incentives to improve quality are not diminished. There are already well-established third party providers of car warranties. To avoid the moral hazard, both the workers and the managers could be asked pay for the deterioration of car quality. For example, both required contributions to the VEBA and executive bonuses could be indexed to the cost of servicing the warranty.
How much will it cost?
The restructuring cost at GM will of course be high, both in human and financial terms. But the alternative is worse: to spend $25 billion on aggravating and postponing the problem. It would be better to give away that money directly to the workers rather than let GM decide how to dissipate it. At over $200,000 for each of GM’s 123,000 North American employees it would a very nice gift. The taxpayers’ cost would be the same, but at least the money would help secure a future to hard-hit households.
Bottom Line:
Overall, however, we believe that paying off workers and liquidating the company is equivalent to putting the patient out of his misery before attempting to administer the best economic medicine. Some may argue that GM has been receiving medicine from taxpayers for quite some time, but clearly it has been receiving the wrong medicine. A Chapter 11 bankruptcy gives a firm that needs to restructure the chance to recover. If Chapter 11 cannot save GM, then nothing can.
GM is broke, how to fix it?
General Motors is quickly going down the same path. There is no doubt that it needs a serious restructuring. It burned through $9 billion of cash in the first 9 months of 2008. It has a labor cost 50% higher than U.S.-based Toyota plants, and it produces cars nobody wants. It is saddled with massive pension and healthcare obligations and it is essentially insolvent: its total liabilities are more than 50% greater than the book value of its assets.
Critically, GM’s position on the verge of bankruptcy is not because of the severity of the current financial and economic crisis. The current crisis is simply the proverbial straw that breaks the camel’s back. Without the crisis, the camel would not have lasted long anyway.
Bailout: Cash for a drug addict
If the US government provides GM with a $25 billion loan that allows it to continue operating under current conditions for another year or two, the money would simply be wasted and the problem postponed. GM would still be completely unable to survive in the long term. We are very sympathetic towards the pain of the hundreds of thousands of workers whose jobs are at stake. It is precisely because we are concerned about their long term welfare that we oppose a bailout. Throwing money at a drug addict only enables the addict to continue abusing drugs and ultimately shortens his life. Similarly, government money aimed at a company that needs restructuring enables it to avoid taking responsibility of its future, condemning it to a certain death.
A debt for equity swap won’t work
Unfortunately, in this case the transformation of part of the debt into equity, as proposed by one of us for banks, is not a solution either. GM’s problem is not a short-term liquidity crisis. A debt-for-equity swap would provide temporary relief from GM’s short term obligations, but at the cost of continuing the bleeding and delaying the restructuring. GM would just continue to run down the value of its assets. The only difference with respect to a government bailout would be that investor money instead of taxpayer money would be wasted.
Chapter 11 is the way forward
We believe that a Chapter 11 bankruptcy filing for GM is the only possible solution. However, we recognise that in the current environment, there are several likely inefficiencies associated with the bankruptcy process. In particular, if we do nothing and wait for GM to file for bankruptcy, which would likely happen in a month or so, we would risk a bad outcome of the proceedings, namely an inefficient liquidation of the company and a substantial amount of social disruption from the sudden loss of jobs. We therefore propose that the government oversee a prepackaged bankruptcy for GM that would give the company the restructuring it badly needs and avoid inefficient liquidation. To be successful, this restructuring requires several elements.
Beware Chapter 11 without DIP financing
First, financing must be available during the restructuring. In normal times, this debtor-in-possession (DIP) financing would typically be provided by financial institutions. However, obtaining DIP in the current environment is a risky business. The market for the provision of DIP is dominated by a few players, and it is not clear how many of them are willing to lend now. JP Morgan, for instance, has several billion of DIP financing tied up with Delphi, GM’s main supplier of parts, which has been in bankruptcy since 2005. It is doubtful that JP Morgan will be willing or able to double up its exposure to the automobile industry. At the same time, GE Capital and Citigroup, who provided the DIP finance for the Chapter 11 bankruptcy of United Airlines, are unlikely to become the financiers of GM because they have problems of their own.
In this case, given the frictions on the credit market, it would be justified for the government to provide DIP financing. This loan would be very different from the one proposed by GM executives and unions. By being senior to all the existing debt it would be relatively safe for the government.
Energising restructuring
Second, the financing must aim to minimise the risk the company remains passive and continues wasting resources. A cautionary tale is found in the DIP financing of Eastern Airlines, which kept flying in bankruptcy until the value of its assets had been driven almost to zero. To avoid this problem, we propose that while the government provides the funding for the loans and the guarantee for most of the losses, the actual lending decision should be made by a commercial bank. In exchange for the underwriting fees, the private bank could be held liable for some percentage of the last losses on the value of GM’s debt. In this way, we impose a limit on GM’s ability to waste resources. When the value of its assets has been impaired, GM will be unable to get any new financing, because the private institutions will pull the plug. In this way we avoid the risk that GM will die of premature death in Chapter 11, but we also prevent GM from exploiting the government guarantee to delay the restructuring.
Third, the GM bankruptcy must avoid setting off a costly chain reaction of other bankruptcies. In particular, the bankruptcy of related suppliers must be avoided. If GM were to default on its payments to these suppliers, many of them would be broke, with negative consequences for the other manufacturers of cars in the United States. DIP financing must therefore be sufficient to allow GM to make its payments to suppliers. Furthermore, bankruptcies of foreign subsidiaries should also be avoided. As the Lehman bankruptcy has shown, foreign proceedings are more rigid and would contribute to the possibility of excessive liquidation.
Fourth, GM must emerge from Chapter 11 as a smaller company. This necessitates shutting down the most money-losing segments of the company, while also providing incentives to foreign manufacturers to buy some of GM’s assets without union contracts attached.
Fifth, GM must emerge from Chapter 11 without massive pension obligations. Legally, the US government is on the hook for any underfunding of accrued pension benefits for US workers, with a cap of $51,750 per person year. Much of the unloading of GM’s pension will therefore happen mechanically and unfortunately will come at a substantial cost to taxpayers. As showed by the United Airlines bankruptcy, it is impossible to know exactly what the magnitude of the government liability will be before the bankruptcy itself happens, due to uncertainty about the value of the assets and also the fact that the government turns the pension liability into a hard riskless claim. Our best estimate is that the underfunded US pensions themselves could cost taxpayers $23 billion. The alternative, however, is worse: to waste money propping up GM and hope that the government pension liability shrinks going forward through a miraculous performance of GM’s pension fund (and risking it might get even larger).
Sixth, GM must emerge from Chapter 11 without enormous retiree medical care liabilities. By negotiating with its white-collar employees, GM has been able to get the unfunded part of this liability down to a “mere” $34 billion. Furthermore, GM and the United Auto Workers (UAW) have agreed to a special fund for a Voluntary Employee Beneficiaries Association (VEBA). Under this agreement, however, billions of dollars of additional cash contributions are due from GM in the next several years. The agreement will have to be revisited in Chapter 11. We recommend that some of the liability be funded with shares in the reorganised company. This is how United Airlines pilots were compensated for some of their losses from uncovered pension benefits in the UAL bankruptcy.
Assuring consumers: Insuring warranties
Finally, the bankruptcy plan would have to address perhaps the biggest challenge of a Chapter 11 filing: the risk that the customers will desert GM because of concerns about the value of its car warranties. People were not afraid to fly United Airlines when it was in Chapter 11. However, a trip is a relatively short-lived transaction and a customer does not care about the fate of the airline once he has arrived home. With cars, the fear of losing the warranty might be large enough that the potential customers will shy away. Even worse, this fear might become self-fulfilling: if enough customers avoid GM, the survival of the company is at risk.
To avoid this problem, we propose that GM be required to purchase insurance for its warrantees, and to do so in such a way that its incentives to improve quality are not diminished. There are already well-established third party providers of car warranties. To avoid the moral hazard, both the workers and the managers could be asked pay for the deterioration of car quality. For example, both required contributions to the VEBA and executive bonuses could be indexed to the cost of servicing the warranty.
How much will it cost?
The restructuring cost at GM will of course be high, both in human and financial terms. But the alternative is worse: to spend $25 billion on aggravating and postponing the problem. It would be better to give away that money directly to the workers rather than let GM decide how to dissipate it. At over $200,000 for each of GM’s 123,000 North American employees it would a very nice gift. The taxpayers’ cost would be the same, but at least the money would help secure a future to hard-hit households.
Bottom Line:
Overall, however, we believe that paying off workers and liquidating the company is equivalent to putting the patient out of his misery before attempting to administer the best economic medicine. Some may argue that GM has been receiving medicine from taxpayers for quite some time, but clearly it has been receiving the wrong medicine. A Chapter 11 bankruptcy gives a firm that needs to restructure the chance to recover. If Chapter 11 cannot save GM, then nothing can.
Rediff: Citi's toxic assets = 6 times Indian banks' total m-cap
The US banking behemoth Citigroup has got risky assets worth $306 billion -- a figure equivalent to over half the total assets, nearly six times of market value as well as annual revenue, or about 50-times of full-year net profit of all Indian banks together!
For instance, all the Indian banks taken together have a current market capitalization as well as full-year revenue of a little over $50 billion each.
Even the total assets of all the Indian banks, at about $580 billion, is estimated to be less than double the size of NRI Vikram Pandit-led Citi group's toxic assets.
If we consider only private banks in the country, their total assets, at about $150 billion, are only half the size of risky assets with Citi.
Besides, the total full-year net profit of all the Indian banks together, at about $6.5 billion, is just about two per cent of the toxic assets lying with Citi.
In one of the biggest rescue acts in the world's banking history, Citigroup on Monday said that it would get a $40-billion capital infusion as part of a pact reached with the US Government's Treasury Department -- the central bank Federal Reserve and Federal Depository Insurance Corp, the government agency that is often appointed as receiver for failed banks.
For instance, all the Indian banks taken together have a current market capitalization as well as full-year revenue of a little over $50 billion each.
Even the total assets of all the Indian banks, at about $580 billion, is estimated to be less than double the size of NRI Vikram Pandit-led Citi group's toxic assets.
If we consider only private banks in the country, their total assets, at about $150 billion, are only half the size of risky assets with Citi.
Besides, the total full-year net profit of all the Indian banks together, at about $6.5 billion, is just about two per cent of the toxic assets lying with Citi.
In one of the biggest rescue acts in the world's banking history, Citigroup on Monday said that it would get a $40-billion capital infusion as part of a pact reached with the US Government's Treasury Department -- the central bank Federal Reserve and Federal Depository Insurance Corp, the government agency that is often appointed as receiver for failed banks.
ET: 22 Banks Collapsed In The US This Year
As many as 22 American banks have collapsed this year so far, even as the banking giant Citigroup, led by Indian-American, Vikram Pandit, struggled this week to save itself from becoming number 23 in this fast growing long list.
On Friday, three US banks collapsed with two of them being in California and the third one in Georgia.
With little signs of improvement, The Wall Street Journal said regulators expect more failures during the remaining part of this year and next year, as "rotting real estates and other loans continue to weigh down bank balance sheets."
Collapse of such a large number of American banks, despite a $700 billion bailout package reflects the deep turmoil of the US economy. From 2003 to 2007 only 10 US banks were reported to have collapsed. In 2008, the figure has already touched 22 and still more than a month to go.
On Friday, three US banks collapsed with two of them being in California and the third one in Georgia.
With little signs of improvement, The Wall Street Journal said regulators expect more failures during the remaining part of this year and next year, as "rotting real estates and other loans continue to weigh down bank balance sheets."
Collapse of such a large number of American banks, despite a $700 billion bailout package reflects the deep turmoil of the US economy. From 2003 to 2007 only 10 US banks were reported to have collapsed. In 2008, the figure has already touched 22 and still more than a month to go.
Sunday, November 23, 2008
4 Point Solution…
Hi Guys, yesterday I was watching PM’s speech in Hindustan Times Leadership program. After his speech Mr. Amit Mitra, General Secretary of FICCI (Federation of Indian Chambers of Commerce & Industry) asked him 3 questions. Out of those 3 questions, first question was, how exactly in this financial crisis world is facing; India is going to achieve the 8% growth (that PM said in his speech before this question & answer session)? For this question PM Mr. Manmohan Singh’s answer was crystal clear that his government will not spare any public instruments like
1.Monetary Policies
2.Fiscal Policies
3.Foreign exchange Policies &
4.Public Infrastructure investments use all these to their fullest capacity.
For his clear strategy & vision or mission whatever you call, audience (including of all industry bigwigs, politicians & media persons) gave him a standing ovation!
What I think is we Indians must be lucky to have Mr. Manmohan Singh as Prime Minister and his team like Chidambaram, Sam Pitroda, & etc in this time of crisis. I don’t think we have such a QUALIKFIED, KNOWLEDGEABLE & EXPERIENCED (well handled the crisis of 1991 & 1997) economist cum politicians.
Now coming to today’s discussion or my posting is about how actually these 4 issues to be handled???
But before going into that, I would like make one point very clear is that, in any type crisis people tend to behave panicky. Common man will not think of rationality or logically may be 1929’s great depression, 1973’s oil shock, Harshad Mehta & Khetan Parekh’s stock market scams, 1997 South East Asian crisis or 2001 dotcom bubble burst. If people think rationally these crisis would not have happened or not with so much intensity! We all Indians know when ICICI bank’s rumour of exposure of Subprime crisis hit, each & every person withdrawn their money. Leave our country, its same with the so called developed country or Big brother, US! Couple of weeks back when Dow fell more than 700 points, some people withdrawn their deposits and literally buried it under the ground!!! So what Mr. Chidambaram is asking from investors (think rationally) is something simply impossible!
So starting with Monetary & Fiscal policies, I would like to start with very note on what is basic difference between both of these?
In simple terms monetary policy is the policy which decided by the Central Bank, RBI.
And fiscal policy is the policy which is decided by the Central governments.
Now starting with monetary policy, RBI has already infused almost Rs. 3000000000000 within one month or so by reducing CRR, repo & SLR as inflation is coming down. But still industry & markets are facing the heat of liquidity. Why? They still feel that the interest rates are quite high. Keynes said, in the crisis time best move from monetary side is make interest rates cheap as much as possible. But the present question RBI is facing is how much cheap? Since they need to monitor inflation also. But what I feel is RBI should go ahead with Keynesian strategy and reduce the interest rates on subsequent basis without worrying about inflation. Because in the time of crisis people will not spend, so when there is no demand, then there is no inflation. Even if in worst case demand increases also, then because of low interest rate industry will be in position take the money and cater the required the demand. So money should reach the people’s hands & pockets. So it’s all about boosting the sentiments of the people. Which creates rotation of money which leads to productivity & employment will be taken care of automatically. Like Keynes said give the money to people to dig the ditches and again to fill them. It’s the way of avoiding deflation & recession.
And coming to Foreign exchange policy, I think RBI is doing quite well. By holding partly convertible rupee around Rs. 50/$. Since I believe RBI don’t have any other options apart from selling Dollars through its reserve baskets as FIIs are demanding Dollars. In this crisis time at least it will help the exporters even though it is hurting imports.
In fiscal policy I can say that Mr. P.M. & F.M. foresaw the crisis and allotted quite as fiscal deficit in the budget & farm loan waiver is part of that. But now what can they do is reduce the taxes (I.T., Exercise duty & sales tax). So most of the people’s purchasing power will increase which again leads to demand and in turn production & employment. So they need monetary policy support here.
In addition to this government must continue with its infrastructure investments. I know it may not give immediate solution to present crisis condition but again it’s about people’s sentiments! In this we have 2 benefits; one is the kind of employment employed in this kind of big projects & second one is improve in infrastructure which will help all segments including farmers also so that they will be accessible proper markets and sell their agree products to a proper value. But how to implement this? Are our government offices so efficient & effective? I don’t think so! So one solution is PPP, Private Public Partnership. The best example was, when S.M. Krishna was C.M. of Karnataka he constituted the PPP by making Narayanmurthy(Mentor, Infosys) as a head of PPP. At that time only Bangalore & Karnataka improved a lot in terms of infrastructure, IT parks, land document distribution system(BHOOMI), midday meals in schools & etc. That different that after Krishna’s term Narayanmurthy didn’t get support from successive governments & instead people like our former PM Devegouda troubled him, so finally he resigned from that post.
So PPP is the best way to develop & implement the infrastructure.
Bottom line:
So everything is interlinked in terms of micro economy. Every other thing needs to support the other thing at least in the crisis hour.
1.Monetary Policies
2.Fiscal Policies
3.Foreign exchange Policies &
4.Public Infrastructure investments use all these to their fullest capacity.
For his clear strategy & vision or mission whatever you call, audience (including of all industry bigwigs, politicians & media persons) gave him a standing ovation!
What I think is we Indians must be lucky to have Mr. Manmohan Singh as Prime Minister and his team like Chidambaram, Sam Pitroda, & etc in this time of crisis. I don’t think we have such a QUALIKFIED, KNOWLEDGEABLE & EXPERIENCED (well handled the crisis of 1991 & 1997) economist cum politicians.
Now coming to today’s discussion or my posting is about how actually these 4 issues to be handled???
But before going into that, I would like make one point very clear is that, in any type crisis people tend to behave panicky. Common man will not think of rationality or logically may be 1929’s great depression, 1973’s oil shock, Harshad Mehta & Khetan Parekh’s stock market scams, 1997 South East Asian crisis or 2001 dotcom bubble burst. If people think rationally these crisis would not have happened or not with so much intensity! We all Indians know when ICICI bank’s rumour of exposure of Subprime crisis hit, each & every person withdrawn their money. Leave our country, its same with the so called developed country or Big brother, US! Couple of weeks back when Dow fell more than 700 points, some people withdrawn their deposits and literally buried it under the ground!!! So what Mr. Chidambaram is asking from investors (think rationally) is something simply impossible!
So starting with Monetary & Fiscal policies, I would like to start with very note on what is basic difference between both of these?
In simple terms monetary policy is the policy which decided by the Central Bank, RBI.
And fiscal policy is the policy which is decided by the Central governments.
Now starting with monetary policy, RBI has already infused almost Rs. 3000000000000 within one month or so by reducing CRR, repo & SLR as inflation is coming down. But still industry & markets are facing the heat of liquidity. Why? They still feel that the interest rates are quite high. Keynes said, in the crisis time best move from monetary side is make interest rates cheap as much as possible. But the present question RBI is facing is how much cheap? Since they need to monitor inflation also. But what I feel is RBI should go ahead with Keynesian strategy and reduce the interest rates on subsequent basis without worrying about inflation. Because in the time of crisis people will not spend, so when there is no demand, then there is no inflation. Even if in worst case demand increases also, then because of low interest rate industry will be in position take the money and cater the required the demand. So money should reach the people’s hands & pockets. So it’s all about boosting the sentiments of the people. Which creates rotation of money which leads to productivity & employment will be taken care of automatically. Like Keynes said give the money to people to dig the ditches and again to fill them. It’s the way of avoiding deflation & recession.
And coming to Foreign exchange policy, I think RBI is doing quite well. By holding partly convertible rupee around Rs. 50/$. Since I believe RBI don’t have any other options apart from selling Dollars through its reserve baskets as FIIs are demanding Dollars. In this crisis time at least it will help the exporters even though it is hurting imports.
In fiscal policy I can say that Mr. P.M. & F.M. foresaw the crisis and allotted quite as fiscal deficit in the budget & farm loan waiver is part of that. But now what can they do is reduce the taxes (I.T., Exercise duty & sales tax). So most of the people’s purchasing power will increase which again leads to demand and in turn production & employment. So they need monetary policy support here.
In addition to this government must continue with its infrastructure investments. I know it may not give immediate solution to present crisis condition but again it’s about people’s sentiments! In this we have 2 benefits; one is the kind of employment employed in this kind of big projects & second one is improve in infrastructure which will help all segments including farmers also so that they will be accessible proper markets and sell their agree products to a proper value. But how to implement this? Are our government offices so efficient & effective? I don’t think so! So one solution is PPP, Private Public Partnership. The best example was, when S.M. Krishna was C.M. of Karnataka he constituted the PPP by making Narayanmurthy(Mentor, Infosys) as a head of PPP. At that time only Bangalore & Karnataka improved a lot in terms of infrastructure, IT parks, land document distribution system(BHOOMI), midday meals in schools & etc. That different that after Krishna’s term Narayanmurthy didn’t get support from successive governments & instead people like our former PM Devegouda troubled him, so finally he resigned from that post.
So PPP is the best way to develop & implement the infrastructure.
Bottom line:
So everything is interlinked in terms of micro economy. Every other thing needs to support the other thing at least in the crisis hour.
Saturday, November 22, 2008
FE: Markets Factor in RBI rate cut
Hi guys, here is one more analysis how the Interest Swap rates, bond price & yields are inter related to Central Bank(RBI)'s interest rate policies which is front page news of Financial Express...
The financial markets are clearly holding their breath in expectation of a rate cut by the Reserve bank of India (RBI) soon. Interest-rate swaps sank to their lowest rate since 2004, dropping 84 basis points this week by Friday. Interest-rate swaps compare a fixed rate of interest to a future stream of payments using floating rate. Swap rates are seen as a good indicator of how rates will move and their recent fall indicates an anticipation of monetary policy easing by the central bank.
Simultaneously, the yield on ten-year government bonds fell 6 bps on Friday to 7.20%-the lowest level since January 2006—another sign that markets have factored in an RBI interest rate cut.Over the last one month,yields on gilt-edged securities have fallen 52 bps. A lower yield indicates higher demand for government paper, which would take place if rates were cut.
Market expectations also received a fillip from comments made by Prime Minister Manmohan Singh at a conference in New Delhi on Friday morning. Singh said his government is committed to using all the resources at its disposal to ensure flag. “You have my assurance that despite (the) adverse international environment, we have the capacity and ability to sustain a growth rate of about 8%,’’the PMsaid.
“No instrument of public policy will be spared, whether it is fiscal policy, monetary policy, exchange rate policy, public-investment policy—all will be deployed to ensure an environment conducive to the growth of enterprise,” Singh said, hinting at using exchange-rate management tools for the first time since the global crisis broke out.
Partly in anticipation of the rate cuts, the stock market also reversed a seven-day losing streak. The BSE Sensex closed at 8,915.21, up 464.20 points, or 5.49%. The NSE’s Nifty ended at 2,693.45 points, up 5.50%. Call money rates ended near 6% on Friday because demand eased on reporting day, with most banks having met their reserve requirement for the current reporting fortnight, money market dealers said.
Earlier in the week, finance minister P Chidambaram had said that the central bank, which reduced its benchmark repurchase rate twice within two weeks, has scope to cut rates again, but that inflation needs to fall further before growth can become the sole focus. Inflation fell to 8.90% for the week ended November 8.
RBI governor Duvvuri Subbarao was also in the capital this week to attend the apex crisis panel meeting headed by the Prime Minister on Monday. Subbarao had an extensive meeting with Chidambaram on Tuesday.
The financial markets are clearly holding their breath in expectation of a rate cut by the Reserve bank of India (RBI) soon. Interest-rate swaps sank to their lowest rate since 2004, dropping 84 basis points this week by Friday. Interest-rate swaps compare a fixed rate of interest to a future stream of payments using floating rate. Swap rates are seen as a good indicator of how rates will move and their recent fall indicates an anticipation of monetary policy easing by the central bank.
Simultaneously, the yield on ten-year government bonds fell 6 bps on Friday to 7.20%-the lowest level since January 2006—another sign that markets have factored in an RBI interest rate cut.Over the last one month,yields on gilt-edged securities have fallen 52 bps. A lower yield indicates higher demand for government paper, which would take place if rates were cut.
Market expectations also received a fillip from comments made by Prime Minister Manmohan Singh at a conference in New Delhi on Friday morning. Singh said his government is committed to using all the resources at its disposal to ensure flag. “You have my assurance that despite (the) adverse international environment, we have the capacity and ability to sustain a growth rate of about 8%,’’the PMsaid.
“No instrument of public policy will be spared, whether it is fiscal policy, monetary policy, exchange rate policy, public-investment policy—all will be deployed to ensure an environment conducive to the growth of enterprise,” Singh said, hinting at using exchange-rate management tools for the first time since the global crisis broke out.
Partly in anticipation of the rate cuts, the stock market also reversed a seven-day losing streak. The BSE Sensex closed at 8,915.21, up 464.20 points, or 5.49%. The NSE’s Nifty ended at 2,693.45 points, up 5.50%. Call money rates ended near 6% on Friday because demand eased on reporting day, with most banks having met their reserve requirement for the current reporting fortnight, money market dealers said.
Earlier in the week, finance minister P Chidambaram had said that the central bank, which reduced its benchmark repurchase rate twice within two weeks, has scope to cut rates again, but that inflation needs to fall further before growth can become the sole focus. Inflation fell to 8.90% for the week ended November 8.
RBI governor Duvvuri Subbarao was also in the capital this week to attend the apex crisis panel meeting headed by the Prime Minister on Monday. Subbarao had an extensive meeting with Chidambaram on Tuesday.
One Line
Dow Jones trading 6% higher as President-Elect Barack Obama nominated New York Federal Reserve Bank chief Timothy Geithner to head the Treasury.
BL Editorial: ‘…We all fall down’ - S. S. Tarapore
Hey guys sorry to post it twice but I wanted to make some highlights in the article so I am posting it again. In this article Mr. Tarapore who headed the CAPITAL ACCOUNT CONVERTIBILITY committee excellently analyzed the present condition with respect to Interest rate, Inflation, Exchange rate & Driving market force which are the constituents of the IMPOSSIBLE TRINITY. Its really good one guys thats why I am taking trouble to post twice with highlighted portions...
The global meltdown is deeply entrenched and no country is being spared the fall out. As Haberler said in Prosperity and Depression (1937), the seeds of a depression are laid in the preceding boom; thus, the present meltdown is the retribution for the sins of the past. Paul Krugman calls it a “nasty recession” which is perhaps a euphemism for “Depression”. The “D” word is still taboo, but it would be prudent to avoid facile solutions.
Heads of the G-20 countries have resolved that time-bound affirmative action would be taken and countries would co-operate and co-ordinate their efforts. Fifty years ago, Wilhelm Ropke, the Swiss economist, said that the more countries talk about international co-operation, the less there is effective co-ordination.
There is no reason to doubt the earnestness of the present initiatives but, ultimately, there is a need for country-specific action, particularly on external sector management. There are no clear-cut policies which can be followed and so it is best to go back to simple first principles.
If a country’s inflation rate is higher than that of the major industrial countries (as is the case in India), it is necessary to have a higher nominal rate of interest. As Moody’s have rightly warned, excessive interest rate easing would hurt. Some newspaper columnists too have recently expressed the fear that India could be building up the mother of all inflationary potentials.
Closely linked to interest rates is the need for an appropriate exchange rate policy and in this context there is reference to the Real Effective Exchange Rate, which is the trade-weighted nominal exchange rate, adjusted for inflation rate differentials.
‘Impossible Trinity’
The Reserve Bank of India (RBI) has been under attack from some analysts who draw reference to the Impossible Trinity, under which a country cannot simultaneously have an independent monetary policy, open capital account and a managed exchange rate, and that one of these objectives has to be given up.
During the recent cycle of large capital flows, the then RBI Governor, Dr Y.V. Reddy, was pilloried for intervening in the forex market. It was argued by highly respected High-level Committees that the appropriate exchange rate policy for India would have been to leave it to the market. Had the RBI followed this advice, during the period of heavy capital inflows, the nominal US dollar-rupee rate could possibly have appreciated to say $1=Rs 20.
Equally, as capital outflows gathered momentum, a hands-off policy by the RBI could conceivably have resulted in a depreciation of the rupee to say $1=Rs 80 (these figures are illustrative and not derived from any empirical analysis).
Advocates of a totally market-determined exchange rate argue that under their prescription, there would be no significant volatility in the exchange rate, but responsible policy-makers just cannot take such risks.
If the exchange rate were to experience savage risks, Indian industry would be devastated. Governors Rangarajan, Jalan and Reddy have tried to explain the soundness of the RBI’s exchange rate policy, but to no avail. The RBI attempts to come as close as possible to the tripod of the Impossible Trinity — reflecting the general theory of the second best.
What do first principles tell us about the balance of payments current account deficit (CAD) and the exchange rate? A country with a sizeable CAD cannot afford an appreciation of the currency. Countries with a large and sustained CAD could allow some appreciation.
The right approach
History shows that large capital inflows are invariably followed by large capital outflows. What would have happened had the RBI followed a hands-off policy on the exchange rate? The forex reserves would have been low and India would not have the wherewithal to meet the large outflows. Does not the nation owe a debt to selfless Governors of the past two decades, who have borne the barrage of criticism, yet done the right thing?
In the current international environment, India would find it hard to roll over the short-term liabilities which are reportedly $50-70 billion in the next few months. The authorities should ensure that these liabilities are paid off if the rollovers are available only at exorbitant interest rates.
To the extent there is a shortage of rupees to meet the forex liabilities we need to eschew brilliant financial engineering to hide the created money in the system. It is important not to contaminate the RBI balance sheet by dubious transactions to prevent the created money from showing up in the numbers.
A policy response to the domestic liquidity crunch has been to encourage all and sundry to go abroad and borrow, precisely at the time the major international markets are facing a crunch. This is a dangerous policy option. First, if the borrower does not have a good rating the cost would be high.
Secondly, there is the danger of an individual borrower defaulting. It is all very well to argue that this is not tantamount to a sovereign default, but a single Indian borrower default could affect the country’s rating. Thus, there is merit in allowing only the very best Indian borrowers to go abroad.
Using forex reserves
There is a lot of intemperate talk about resolving the rupee crunch by directly lending forex from the RBI’s reserves. Career central bankers, now in the top management of the RBI, would surely have visceral memories of RBI placing deposits with overseas branches of Indian banks and, when the RBI wanted to use these reserves, the banks were unable to repay.
Similarly, there are insensate proposals for the RBI to place its forex with institutions lending for infrastructure. This is nothing short of a fudge. We can delude ourselves but we cannot delude the international financial markets. The RBI must release forex only if the buyer, including the government, puts down the rupees. There are obvious dangers of the RBI opening up the monetary spigots. The forex reserves should only be used to meet forex liabilities — the reserves just cannot be a substitute for domestic resources.
Interest rates in a number of industrial countries are slowly moving to the zero level. While as part of international co-operation we have to make the right genuflections, we need to recognise the dangers of following the leader. As Vivek Moorthy, one of the few Indian economists dedicated to monetary economics, says, easy money leads to a meltdown.
There is considerable ecstasy that the centre of economic power is moving to India and China. What this implies is that these countries would have to bear the brunt of international adjustment. Are we ready to take on this additional burden?
The world is poised on a precipice and we need to remember the nursery rhyme Ring-a, ring-a roses, that ends: “…We all fall down”. And we need to ensure that in the process we do not break the spinal column of the Indian economy.
The global meltdown is deeply entrenched and no country is being spared the fall out. As Haberler said in Prosperity and Depression (1937), the seeds of a depression are laid in the preceding boom; thus, the present meltdown is the retribution for the sins of the past. Paul Krugman calls it a “nasty recession” which is perhaps a euphemism for “Depression”. The “D” word is still taboo, but it would be prudent to avoid facile solutions.
Heads of the G-20 countries have resolved that time-bound affirmative action would be taken and countries would co-operate and co-ordinate their efforts. Fifty years ago, Wilhelm Ropke, the Swiss economist, said that the more countries talk about international co-operation, the less there is effective co-ordination.
There is no reason to doubt the earnestness of the present initiatives but, ultimately, there is a need for country-specific action, particularly on external sector management. There are no clear-cut policies which can be followed and so it is best to go back to simple first principles.
If a country’s inflation rate is higher than that of the major industrial countries (as is the case in India), it is necessary to have a higher nominal rate of interest. As Moody’s have rightly warned, excessive interest rate easing would hurt. Some newspaper columnists too have recently expressed the fear that India could be building up the mother of all inflationary potentials.
Closely linked to interest rates is the need for an appropriate exchange rate policy and in this context there is reference to the Real Effective Exchange Rate, which is the trade-weighted nominal exchange rate, adjusted for inflation rate differentials.
‘Impossible Trinity’
The Reserve Bank of India (RBI) has been under attack from some analysts who draw reference to the Impossible Trinity, under which a country cannot simultaneously have an independent monetary policy, open capital account and a managed exchange rate, and that one of these objectives has to be given up.
During the recent cycle of large capital flows, the then RBI Governor, Dr Y.V. Reddy, was pilloried for intervening in the forex market. It was argued by highly respected High-level Committees that the appropriate exchange rate policy for India would have been to leave it to the market. Had the RBI followed this advice, during the period of heavy capital inflows, the nominal US dollar-rupee rate could possibly have appreciated to say $1=Rs 20.
Equally, as capital outflows gathered momentum, a hands-off policy by the RBI could conceivably have resulted in a depreciation of the rupee to say $1=Rs 80 (these figures are illustrative and not derived from any empirical analysis).
Advocates of a totally market-determined exchange rate argue that under their prescription, there would be no significant volatility in the exchange rate, but responsible policy-makers just cannot take such risks.
If the exchange rate were to experience savage risks, Indian industry would be devastated. Governors Rangarajan, Jalan and Reddy have tried to explain the soundness of the RBI’s exchange rate policy, but to no avail. The RBI attempts to come as close as possible to the tripod of the Impossible Trinity — reflecting the general theory of the second best.
What do first principles tell us about the balance of payments current account deficit (CAD) and the exchange rate? A country with a sizeable CAD cannot afford an appreciation of the currency. Countries with a large and sustained CAD could allow some appreciation.
The right approach
History shows that large capital inflows are invariably followed by large capital outflows. What would have happened had the RBI followed a hands-off policy on the exchange rate? The forex reserves would have been low and India would not have the wherewithal to meet the large outflows. Does not the nation owe a debt to selfless Governors of the past two decades, who have borne the barrage of criticism, yet done the right thing?
In the current international environment, India would find it hard to roll over the short-term liabilities which are reportedly $50-70 billion in the next few months. The authorities should ensure that these liabilities are paid off if the rollovers are available only at exorbitant interest rates.
To the extent there is a shortage of rupees to meet the forex liabilities we need to eschew brilliant financial engineering to hide the created money in the system. It is important not to contaminate the RBI balance sheet by dubious transactions to prevent the created money from showing up in the numbers.
A policy response to the domestic liquidity crunch has been to encourage all and sundry to go abroad and borrow, precisely at the time the major international markets are facing a crunch. This is a dangerous policy option. First, if the borrower does not have a good rating the cost would be high.
Secondly, there is the danger of an individual borrower defaulting. It is all very well to argue that this is not tantamount to a sovereign default, but a single Indian borrower default could affect the country’s rating. Thus, there is merit in allowing only the very best Indian borrowers to go abroad.
Using forex reserves
There is a lot of intemperate talk about resolving the rupee crunch by directly lending forex from the RBI’s reserves. Career central bankers, now in the top management of the RBI, would surely have visceral memories of RBI placing deposits with overseas branches of Indian banks and, when the RBI wanted to use these reserves, the banks were unable to repay.
Similarly, there are insensate proposals for the RBI to place its forex with institutions lending for infrastructure. This is nothing short of a fudge. We can delude ourselves but we cannot delude the international financial markets. The RBI must release forex only if the buyer, including the government, puts down the rupees. There are obvious dangers of the RBI opening up the monetary spigots. The forex reserves should only be used to meet forex liabilities — the reserves just cannot be a substitute for domestic resources.
Interest rates in a number of industrial countries are slowly moving to the zero level. While as part of international co-operation we have to make the right genuflections, we need to recognise the dangers of following the leader. As Vivek Moorthy, one of the few Indian economists dedicated to monetary economics, says, easy money leads to a meltdown.
There is considerable ecstasy that the centre of economic power is moving to India and China. What this implies is that these countries would have to bear the brunt of international adjustment. Are we ready to take on this additional burden?
The world is poised on a precipice and we need to remember the nursery rhyme Ring-a, ring-a roses, that ends: “…We all fall down”. And we need to ensure that in the process we do not break the spinal column of the Indian economy.
BL Editorial: ‘…We all fall down’ - S. S. Tarapore
The global meltdown is deeply entrenched and no country is being spared the fall out. As Haberler said in Prosperity and Depression (1937), the seeds of a depression are laid in the preceding boom; thus, the present meltdown is the retribution for the sins of the past. Paul Krugman calls it a “nasty recession” which is perhaps a euphemism for “Depression”. The “D” word is still taboo, but it would be prudent to avoid facile solutions.
Heads of the G-20 countries have resolved that time-bound affirmative action would be taken and countries would co-operate and co-ordinate their efforts. Fifty years ago, Wilhelm Ropke, the Swiss economist, said that the more countries talk about international co-operation, the less there is effective co-ordination.
There is no reason to doubt the earnestness of the present initiatives but, ultimately, there is a need for country-specific action, particularly on external sector management. There are no clear-cut policies which can be followed and so it is best to go back to simple first principles.
If a country’s inflation rate is higher than that of the major industrial countries (as is the case in India), it is necessary to have a higher nominal rate of interest. As Moody’s have rightly warned, excessive interest rate easing would hurt. Some newspaper columnists too have recently expressed the fear that India could be building up the mother of all inflationary potentials.
Closely linked to interest rates is the need for an appropriate exchange rate policy and in this context there is reference to the Real Effective Exchange Rate, which is the trade-weighted nominal exchange rate, adjusted for inflation rate differentials.
‘Impossible Trinity’
The Reserve Bank of India (RBI) has been under attack from some analysts who draw reference to the Impossible Trinity, under which a country cannot simultaneously have an independent monetary policy, open capital account and a managed exchange rate, and that one of these objectives has to be given up.
During the recent cycle of large capital flows, the then RBI Governor, Dr Y.V. Reddy, was pilloried for intervening in the forex market. It was argued by highly respected High-level Committees that the appropriate exchange rate policy for India would have been to leave it to the market. Had the RBI followed this advice, during the period of heavy capital inflows, the nominal US dollar-rupee rate could possibly have appreciated to say $1=Rs 20.
Equally, as capital outflows gathered momentum, a hands-off policy by the RBI could conceivably have resulted in a depreciation of the rupee to say $1=Rs 80 (these figures are illustrative and not derived from any empirical analysis).
Advocates of a totally market-determined exchange rate argue that under their prescription, there would be no significant volatility in the exchange rate, but responsible policy-makers just cannot take such risks.
If the exchange rate were to experience savage risks, Indian industry would be devastated. Governors Rangarajan, Jalan and Reddy have tried to explain the soundness of the RBI’s exchange rate policy, but to no avail. The RBI attempts to come as close as possible to the tripod of the Impossible Trinity — reflecting the general theory of the second best.
What do first principles tell us about the balance of payments current account deficit (CAD) and the exchange rate? A country with a sizeable CAD cannot afford an appreciation of the currency. Countries with a large and sustained CAD could allow some appreciation.
The right approach
History shows that large capital inflows are invariably followed by large capital outflows. What would have happened had the RBI followed a hands-off policy on the exchange rate? The forex reserves would have been low and India would not have the wherewithal to meet the large outflows. Does not the nation owe a debt to selfless Governors of the past two decades, who have borne the barrage of criticism, yet done the right thing?
In the current international environment, India would find it hard to roll over the short-term liabilities which are reportedly $50-70 billion in the next few months. The authorities should ensure that these liabilities are paid off if the rollovers are available only at exorbitant interest rates.
To the extent there is a shortage of rupees to meet the forex liabilities we need to eschew brilliant financial engineering to hide the created money in the system. It is important not to contaminate the RBI balance sheet by dubious transactions to prevent the created money from showing up in the numbers.
A policy response to the domestic liquidity crunch has been to encourage all and sundry to go abroad and borrow, precisely at the time the major international markets are facing a crunch. This is a dangerous policy option. First, if the borrower does not have a good rating the cost would be high.
Secondly, there is the danger of an individual borrower defaulting. It is all very well to argue that this is not tantamount to a sovereign default, but a single Indian borrower default could affect the country’s rating. Thus, there is merit in allowing only the very best Indian borrowers to go abroad.
Using forex reserves
There is a lot of intemperate talk about resolving the rupee crunch by directly lending forex from the RBI’s reserves. Career central bankers, now in the top management of the RBI, would surely have visceral memories of RBI placing deposits with overseas branches of Indian banks and, when the RBI wanted to use these reserves, the banks were unable to repay.
Similarly, there are insensate proposals for the RBI to place its forex with institutions lending for infrastructure. This is nothing short of a fudge. We can delude ourselves but we cannot delude the international financial markets. The RBI must release forex only if the buyer, including the government, puts down the rupees. There are obvious dangers of the RBI opening up the monetary spigots. The forex reserves should only be used to meet forex liabilities — the reserves just cannot be a substitute for domestic resources.
Interest rates in a number of industrial countries are slowly moving to the zero level. While as part of international co-operation we have to make the right genuflections, we need to recognise the dangers of following the leader. As Vivek Moorthy, one of the few Indian economists dedicated to monetary economics, says, easy money leads to a meltdown.
There is considerable ecstasy that the centre of economic power is moving to India and China. What this implies is that these countries would have to bear the brunt of international adjustment. Are we ready to take on this additional burden?
The world is poised on a precipice and we need to remember the nursery rhyme Ring-a, ring-a roses, that ends: “…We all fall down”. And we need to ensure that in the process we do not break the spinal column of the Indian economy.
Heads of the G-20 countries have resolved that time-bound affirmative action would be taken and countries would co-operate and co-ordinate their efforts. Fifty years ago, Wilhelm Ropke, the Swiss economist, said that the more countries talk about international co-operation, the less there is effective co-ordination.
There is no reason to doubt the earnestness of the present initiatives but, ultimately, there is a need for country-specific action, particularly on external sector management. There are no clear-cut policies which can be followed and so it is best to go back to simple first principles.
If a country’s inflation rate is higher than that of the major industrial countries (as is the case in India), it is necessary to have a higher nominal rate of interest. As Moody’s have rightly warned, excessive interest rate easing would hurt. Some newspaper columnists too have recently expressed the fear that India could be building up the mother of all inflationary potentials.
Closely linked to interest rates is the need for an appropriate exchange rate policy and in this context there is reference to the Real Effective Exchange Rate, which is the trade-weighted nominal exchange rate, adjusted for inflation rate differentials.
‘Impossible Trinity’
The Reserve Bank of India (RBI) has been under attack from some analysts who draw reference to the Impossible Trinity, under which a country cannot simultaneously have an independent monetary policy, open capital account and a managed exchange rate, and that one of these objectives has to be given up.
During the recent cycle of large capital flows, the then RBI Governor, Dr Y.V. Reddy, was pilloried for intervening in the forex market. It was argued by highly respected High-level Committees that the appropriate exchange rate policy for India would have been to leave it to the market. Had the RBI followed this advice, during the period of heavy capital inflows, the nominal US dollar-rupee rate could possibly have appreciated to say $1=Rs 20.
Equally, as capital outflows gathered momentum, a hands-off policy by the RBI could conceivably have resulted in a depreciation of the rupee to say $1=Rs 80 (these figures are illustrative and not derived from any empirical analysis).
Advocates of a totally market-determined exchange rate argue that under their prescription, there would be no significant volatility in the exchange rate, but responsible policy-makers just cannot take such risks.
If the exchange rate were to experience savage risks, Indian industry would be devastated. Governors Rangarajan, Jalan and Reddy have tried to explain the soundness of the RBI’s exchange rate policy, but to no avail. The RBI attempts to come as close as possible to the tripod of the Impossible Trinity — reflecting the general theory of the second best.
What do first principles tell us about the balance of payments current account deficit (CAD) and the exchange rate? A country with a sizeable CAD cannot afford an appreciation of the currency. Countries with a large and sustained CAD could allow some appreciation.
The right approach
History shows that large capital inflows are invariably followed by large capital outflows. What would have happened had the RBI followed a hands-off policy on the exchange rate? The forex reserves would have been low and India would not have the wherewithal to meet the large outflows. Does not the nation owe a debt to selfless Governors of the past two decades, who have borne the barrage of criticism, yet done the right thing?
In the current international environment, India would find it hard to roll over the short-term liabilities which are reportedly $50-70 billion in the next few months. The authorities should ensure that these liabilities are paid off if the rollovers are available only at exorbitant interest rates.
To the extent there is a shortage of rupees to meet the forex liabilities we need to eschew brilliant financial engineering to hide the created money in the system. It is important not to contaminate the RBI balance sheet by dubious transactions to prevent the created money from showing up in the numbers.
A policy response to the domestic liquidity crunch has been to encourage all and sundry to go abroad and borrow, precisely at the time the major international markets are facing a crunch. This is a dangerous policy option. First, if the borrower does not have a good rating the cost would be high.
Secondly, there is the danger of an individual borrower defaulting. It is all very well to argue that this is not tantamount to a sovereign default, but a single Indian borrower default could affect the country’s rating. Thus, there is merit in allowing only the very best Indian borrowers to go abroad.
Using forex reserves
There is a lot of intemperate talk about resolving the rupee crunch by directly lending forex from the RBI’s reserves. Career central bankers, now in the top management of the RBI, would surely have visceral memories of RBI placing deposits with overseas branches of Indian banks and, when the RBI wanted to use these reserves, the banks were unable to repay.
Similarly, there are insensate proposals for the RBI to place its forex with institutions lending for infrastructure. This is nothing short of a fudge. We can delude ourselves but we cannot delude the international financial markets. The RBI must release forex only if the buyer, including the government, puts down the rupees. There are obvious dangers of the RBI opening up the monetary spigots. The forex reserves should only be used to meet forex liabilities — the reserves just cannot be a substitute for domestic resources.
Interest rates in a number of industrial countries are slowly moving to the zero level. While as part of international co-operation we have to make the right genuflections, we need to recognise the dangers of following the leader. As Vivek Moorthy, one of the few Indian economists dedicated to monetary economics, says, easy money leads to a meltdown.
There is considerable ecstasy that the centre of economic power is moving to India and China. What this implies is that these countries would have to bear the brunt of international adjustment. Are we ready to take on this additional burden?
The world is poised on a precipice and we need to remember the nursery rhyme Ring-a, ring-a roses, that ends: “…We all fall down”. And we need to ensure that in the process we do not break the spinal column of the Indian economy.
Friday, November 21, 2008
One Liners
Inflation came down to 8.9% from 8.98%
Crude oil slips below $50, presently trading around $48.7
Rupee hits another record low at 50.20/21
The Sensex and the Nifty closed below October 27, 2008 values, i.e. 8451 & 2553 respectively
Dow Jones closed 440 minus & ended with 7552
Crude oil slips below $50, presently trading around $48.7
Rupee hits another record low at 50.20/21
The Sensex and the Nifty closed below October 27, 2008 values, i.e. 8451 & 2553 respectively
Dow Jones closed 440 minus & ended with 7552
ET Editorial: Building infrastructure isn't Keynesian
Hi guys, yesterday I posted about Keynesian & Millers economic concept of HELICOPTER MONEY. Yesterday in ET Swaminathan Aiyar wrote excellently about Keynesian concept. So I thought its good thing to post. So…
Across the globe, politicians from Manmohan Singh to Barack Obama plan to boost government spending to revive flagging economies. Especially popular are big infrastructure projects, widely seen as an excellent way to give a Keynesian boost to economies.
Yet this represents a misunderstanding of Keynes. In a recession, many things fall together, production, employment, prices and business profits. Businesses go bust, and this can lead to runs on banks and a crisis in the financial system.
Keynes emphasised that the root cause of a depression was a vicious downward spiral of consumption. Tackle that, he said, and a flagging economy can revive.
Keynes realized that a recession was caused by excess saving, which drove down demand and GDP in a vicious downward spiral.
To escape the spiral, Keynes proposed government action to boost consumption and end over-saving. The government could boost its own spending through public works. Or else it could cut taxes to boost private consumption.
Keynes did not advocate building infrastructure. Instead, he suggested that governments should pay people to dig ditches and then fill them up again. This would not create infrastructure. But it would put money into the pockets of people, and that was the aim of the exercise.
Why, then is infrastructure creation so widely equated with Keynesian economics? Because of public misunderstanding of the history of the Great Depression. US President Roosevelt launched the New Deal to combat the 25% unemployment he faced on being elected in 1932.
The New Deal created jobs in projects to build roads, dams and electric systems. It was a huge political success, and aided his re-election in 1936 and 1940. Yet economists remain sharply divided on its economic impact.
The economy revived from 1932 to 1936, but then plunged into a fresh depression in 1938, wiping out most earlier gains. So, the New Deal created jobs quickly, but not sustainably. It failed to address the financial collapse and deflation that many economists believe turned a mere recession into a Great Depression. The downturn was finally cured not by the New Deal but by World War II: the wartime economy needed all the manpower available.
In the middle of the Great Depression, Keynes produced his seminal General Theory of Employment, Interest and Money, explaining the interaction of production, wages and employment. During the New Deal, Roosevelt swore by balanced budgets, the ruling economic orthodoxy.
But Keynes’ General Theory argued this was a mistake, and that governments should run large fiscal deficits during a recession to pump more demand into the economy. Roosevelt’s budget-balancing efforts typically failed, and he often ended up with budget deficits without meaning to. So he was a Keynesian by accident.
Yet the public remembers Roosevelt as the first leader to try to spend his way out of a recession, exactly what Keynes advocated. After World War II, Keynesian demand management became the new economic orthodoxy. Governments everywhere began pumping money into flagging economies to stimulate growth.
Hubris followed. In the 1970s, constant pumping of money led in many countries to inflation rather than growth. Clearly, Keynesian spending did not boost GDP in all situations. But it retained its reputation as a useful tool, though not a panacea, in recessions. Global experience showed that Keynesian demand management did not require infrastructure spending. The simplest, quickest way to increase purchasing power was to cut taxes. This increased demand instantly.
But, it also had drawbacks. When consumers were given additional purchasing power, they did not necessarily buy domestic goods: they also bought imported goods. Thus the Keynesian stimulus could leak out of the domestic economy through imports, and boost foreign economies instead.
Public spending on infrastructure stood out as a way to minimise such leakages. In most countries, infrastructure utilised mostly domestic equipment and labour. So, the stimulus remained mainly within the country and did not leak out through imports.
Besides, infrastructure projects were popular with politicians keen to channel projects into their constituencies. Politicians hated Keynes’ idea of paying people to dig and fill up ditches. They preferred job creation to build infrastructure, creating a base for future growth.
Manmohan Singh thinks this is the best way to combat the recession. So do many economists. But I have reservations. In Rooosevelt’s time, road building was labour intensive. But today, it is highly mechanised, using little labour. Dams are no longer built by armies of workers.
Power plants, ports and airports are hugely capital-intensive. With today’s technology, infrastructure is not a massive job creator, unless we insist on obsolete, inefficient techniques. This is exactly what we do in the National Rural Employment Guarantee Scheme.
This mandates 60% of the cost must be in wages. But such labour-intensive techniques yield low-quality roads that disappear after every monsoon. Decades of rural employment schemes have failed to create permanent assets. This approach cannot create good infrastructure.
Keynes would not have been surprised. He would have said that creating jobs should not be confused with creating infrastructure. He would have opted for digging and filling ditches. Building infrastructure is time-consuming. Every big project requires a lengthy environmental impact assessment, with public hearings.
Land acquisition disputes can hold up projects for years. So infrastructure projects disburse money slowly, and cannot provide a quick Keynesian boost. Now, India badly needs infrastructure. But this requires massive long-term spending. Don’t confuse this worthy aim with providing a rapid Keynesian boost.
The fastest, most effective boost comes from slashing taxes. In the west, cutting income tax is a popular Keynesian nostrum. But in India only a tiny fraction of people pay income tax. So the right taxes to slash are excise duty and sales tax. These are paid by everybody, and will immediately boost purchasing power. There will be no time lag, as in project spending. That is the Keynesian way to go.
Across the globe, politicians from Manmohan Singh to Barack Obama plan to boost government spending to revive flagging economies. Especially popular are big infrastructure projects, widely seen as an excellent way to give a Keynesian boost to economies.
Yet this represents a misunderstanding of Keynes. In a recession, many things fall together, production, employment, prices and business profits. Businesses go bust, and this can lead to runs on banks and a crisis in the financial system.
Keynes emphasised that the root cause of a depression was a vicious downward spiral of consumption. Tackle that, he said, and a flagging economy can revive.
Keynes realized that a recession was caused by excess saving, which drove down demand and GDP in a vicious downward spiral.
To escape the spiral, Keynes proposed government action to boost consumption and end over-saving. The government could boost its own spending through public works. Or else it could cut taxes to boost private consumption.
Keynes did not advocate building infrastructure. Instead, he suggested that governments should pay people to dig ditches and then fill them up again. This would not create infrastructure. But it would put money into the pockets of people, and that was the aim of the exercise.
Why, then is infrastructure creation so widely equated with Keynesian economics? Because of public misunderstanding of the history of the Great Depression. US President Roosevelt launched the New Deal to combat the 25% unemployment he faced on being elected in 1932.
The New Deal created jobs in projects to build roads, dams and electric systems. It was a huge political success, and aided his re-election in 1936 and 1940. Yet economists remain sharply divided on its economic impact.
The economy revived from 1932 to 1936, but then plunged into a fresh depression in 1938, wiping out most earlier gains. So, the New Deal created jobs quickly, but not sustainably. It failed to address the financial collapse and deflation that many economists believe turned a mere recession into a Great Depression. The downturn was finally cured not by the New Deal but by World War II: the wartime economy needed all the manpower available.
In the middle of the Great Depression, Keynes produced his seminal General Theory of Employment, Interest and Money, explaining the interaction of production, wages and employment. During the New Deal, Roosevelt swore by balanced budgets, the ruling economic orthodoxy.
But Keynes’ General Theory argued this was a mistake, and that governments should run large fiscal deficits during a recession to pump more demand into the economy. Roosevelt’s budget-balancing efforts typically failed, and he often ended up with budget deficits without meaning to. So he was a Keynesian by accident.
Yet the public remembers Roosevelt as the first leader to try to spend his way out of a recession, exactly what Keynes advocated. After World War II, Keynesian demand management became the new economic orthodoxy. Governments everywhere began pumping money into flagging economies to stimulate growth.
Hubris followed. In the 1970s, constant pumping of money led in many countries to inflation rather than growth. Clearly, Keynesian spending did not boost GDP in all situations. But it retained its reputation as a useful tool, though not a panacea, in recessions. Global experience showed that Keynesian demand management did not require infrastructure spending. The simplest, quickest way to increase purchasing power was to cut taxes. This increased demand instantly.
But, it also had drawbacks. When consumers were given additional purchasing power, they did not necessarily buy domestic goods: they also bought imported goods. Thus the Keynesian stimulus could leak out of the domestic economy through imports, and boost foreign economies instead.
Public spending on infrastructure stood out as a way to minimise such leakages. In most countries, infrastructure utilised mostly domestic equipment and labour. So, the stimulus remained mainly within the country and did not leak out through imports.
Besides, infrastructure projects were popular with politicians keen to channel projects into their constituencies. Politicians hated Keynes’ idea of paying people to dig and fill up ditches. They preferred job creation to build infrastructure, creating a base for future growth.
Manmohan Singh thinks this is the best way to combat the recession. So do many economists. But I have reservations. In Rooosevelt’s time, road building was labour intensive. But today, it is highly mechanised, using little labour. Dams are no longer built by armies of workers.
Power plants, ports and airports are hugely capital-intensive. With today’s technology, infrastructure is not a massive job creator, unless we insist on obsolete, inefficient techniques. This is exactly what we do in the National Rural Employment Guarantee Scheme.
This mandates 60% of the cost must be in wages. But such labour-intensive techniques yield low-quality roads that disappear after every monsoon. Decades of rural employment schemes have failed to create permanent assets. This approach cannot create good infrastructure.
Keynes would not have been surprised. He would have said that creating jobs should not be confused with creating infrastructure. He would have opted for digging and filling ditches. Building infrastructure is time-consuming. Every big project requires a lengthy environmental impact assessment, with public hearings.
Land acquisition disputes can hold up projects for years. So infrastructure projects disburse money slowly, and cannot provide a quick Keynesian boost. Now, India badly needs infrastructure. But this requires massive long-term spending. Don’t confuse this worthy aim with providing a rapid Keynesian boost.
The fastest, most effective boost comes from slashing taxes. In the west, cutting income tax is a popular Keynesian nostrum. But in India only a tiny fraction of people pay income tax. So the right taxes to slash are excise duty and sales tax. These are paid by everybody, and will immediately boost purchasing power. There will be no time lag, as in project spending. That is the Keynesian way to go.
Thursday, November 20, 2008
Dow plunges nearly 430 to fall below 8,000 mark
Wall Street hit levels not seen since 2002 -03, with the Dow Jones industrial average falling below the 8,000 mark, as the fate of Detroit's Big Three automakers and the economy disheartened investors
The heads of General Motors Ford and Chrysler are asking for a massive infusion of cash to prevent millions of layoffs and stave off bankruptcy.
Investors were discouraged by the Fed's sharply lowered projection for economic activity this year and next. Economic worries caused across-the-board selling, with financial stocks particularly hard hit.
The Dow finished down nearly 430 points at the 7,990 level.
General Motors Corp. tumbled as much as 18 percent to its lowest price since 1942, while Ford Motor Co. lost 24 percent. Citigroup Inc. slid 17 percent to $6.90, a 13-year low, on a plan to buy $17.4 billion of assets from structured investment vehicles it advises.
JPMorgan, the biggest U.S. bank by market value, lost 2.31, or 7.2 percent, to $29.83, below its lowest closing price since 2003.
Citigroup, which was surpassed by US Bancorp today as the nation's fourth-largest bank by market value, retreated to its lowest price since 1995.
My View:
According to charts, Dow has major support @ 7600 levels when Dot com bubble broke out in 2001-02. But looking at present condition I doubt whether Dow or any other indexes hold their any previous support levels.
As our PM and FM are saying on daily basis market is changing. Even it is becoming difficult for chartists also to predict who otherwise will be very successful in predicting. In this kind markets clearly lost its RADAR which is leading to erratic movements.
As I posted in previous posts, snowballing effect is leading to capitulation!!!
I dont know how governments are going to deal with this kind of condition. But what I feel is THE KEYNESIAN CONCEPT & MILTON's concept (HELICOPTER MONEY where in governments directly give money to firms by avoiding FINANCIAL INTERMEDIARIES) is the best possible solution to this kind of the solution.
But I dont know!!!
The heads of General Motors Ford and Chrysler are asking for a massive infusion of cash to prevent millions of layoffs and stave off bankruptcy.
Investors were discouraged by the Fed's sharply lowered projection for economic activity this year and next. Economic worries caused across-the-board selling, with financial stocks particularly hard hit.
The Dow finished down nearly 430 points at the 7,990 level.
General Motors Corp. tumbled as much as 18 percent to its lowest price since 1942, while Ford Motor Co. lost 24 percent. Citigroup Inc. slid 17 percent to $6.90, a 13-year low, on a plan to buy $17.4 billion of assets from structured investment vehicles it advises.
JPMorgan, the biggest U.S. bank by market value, lost 2.31, or 7.2 percent, to $29.83, below its lowest closing price since 2003.
Citigroup, which was surpassed by US Bancorp today as the nation's fourth-largest bank by market value, retreated to its lowest price since 1995.
My View:
According to charts, Dow has major support @ 7600 levels when Dot com bubble broke out in 2001-02. But looking at present condition I doubt whether Dow or any other indexes hold their any previous support levels.
As our PM and FM are saying on daily basis market is changing. Even it is becoming difficult for chartists also to predict who otherwise will be very successful in predicting. In this kind markets clearly lost its RADAR which is leading to erratic movements.
As I posted in previous posts, snowballing effect is leading to capitulation!!!
I dont know how governments are going to deal with this kind of condition. But what I feel is THE KEYNESIAN CONCEPT & MILTON's concept (HELICOPTER MONEY where in governments directly give money to firms by avoiding FINANCIAL INTERMEDIARIES) is the best possible solution to this kind of the solution.
But I dont know!!!
Monday, November 17, 2008
Market Opening with some gap!!!
Guys, while reading one of my favorite bloger's old posts, I got a very important information for which I was searching from last one year. I was wondering what is exact procedure & how market opens more or less of its previous close. I know traders put orders, depending upon that it will vary, but I wanted know exact procedure. Here is the some info on that, which I got while reading Ajay Shah's blog...
What's a call auction?
Call auctions are like the pre-opening phase at BSE or NSE. Here orders are put into the computer, but trades don't take place immediately. The computer constantly recalculates the "equilibrium price" where the maximum number of shares could be transacted. This process goes on for half an hour or so, and at the end of this the computer says DONE, and all the trades take place. A key feature of the call auction is that there is no bid-ask spread, i.e. all the trades take place at the same price.
Earlier I said that the ELOB market works very well "under normal conditions" with lots of traders and a healthy order flow. Call auctions have been used with a good deal of success, worldwide, in abnormal conditions. For example, NYSE opens every day with a call auction, and whenever circuit breakers are hit, the market drops out of continuous trading into a call auction.
What is wrong with what the other exchanges are trying?
The dominant form of market in India today is the "electronic limit order book (ELOB) market", or the order-matching system that is seen on NSE or BOLT. This is an extremely successful form of market organisation worldwide, and the fact that both BSE and NSE in India are using this idea has made India's markets very advanced by world standards.
The ELOB market works very well for problems like trading Reliance, or futures on Nifty, etc., where you can expect a huge number of people from all over the country to be interested in trading the same thing. The trouble with smallcap stocks is that there are just too few people who take interest in each of the stocks. This makes life difficult when using the ELOB market.
In this sense, there is nothing "wrong" with what the other exchanges are trying. It's just that their focus is on doing the best thing possible for the biggest trading volumes to be found in the country, i.e. problems like trading Reliance or SBI or Nifty futures. It is possible that smallcap stocks require a different approach.
What should the real role for OTCEI be?
Internationally, when we say "Over The Counter", we don't mean "Exchange". The OTC market worldwide is mainly about customised, bilateral deals that are done between big players in investment finance and their customers. There is a huge "OTC derivatives" industry, which consists of trades in options or futures or more complex contracts, between two people, without any exchange being in the picture. In this sense, it is a little odd to say "OTC" and "Exchange" in the same sentence.
In India, we can think of the role of OTC as being that of trying to create liquidity for relatively illiquid stocks. I think that is the most useful way to define the objective of OTCEI: to find techniques of making smallcap stocks more liquid than would be the case on the other major exchanges.
What's a call auction?
Call auctions are like the pre-opening phase at BSE or NSE. Here orders are put into the computer, but trades don't take place immediately. The computer constantly recalculates the "equilibrium price" where the maximum number of shares could be transacted. This process goes on for half an hour or so, and at the end of this the computer says DONE, and all the trades take place. A key feature of the call auction is that there is no bid-ask spread, i.e. all the trades take place at the same price.
Earlier I said that the ELOB market works very well "under normal conditions" with lots of traders and a healthy order flow. Call auctions have been used with a good deal of success, worldwide, in abnormal conditions. For example, NYSE opens every day with a call auction, and whenever circuit breakers are hit, the market drops out of continuous trading into a call auction.
What is wrong with what the other exchanges are trying?
The dominant form of market in India today is the "electronic limit order book (ELOB) market", or the order-matching system that is seen on NSE or BOLT. This is an extremely successful form of market organisation worldwide, and the fact that both BSE and NSE in India are using this idea has made India's markets very advanced by world standards.
The ELOB market works very well for problems like trading Reliance, or futures on Nifty, etc., where you can expect a huge number of people from all over the country to be interested in trading the same thing. The trouble with smallcap stocks is that there are just too few people who take interest in each of the stocks. This makes life difficult when using the ELOB market.
In this sense, there is nothing "wrong" with what the other exchanges are trying. It's just that their focus is on doing the best thing possible for the biggest trading volumes to be found in the country, i.e. problems like trading Reliance or SBI or Nifty futures. It is possible that smallcap stocks require a different approach.
What should the real role for OTCEI be?
Internationally, when we say "Over The Counter", we don't mean "Exchange". The OTC market worldwide is mainly about customised, bilateral deals that are done between big players in investment finance and their customers. There is a huge "OTC derivatives" industry, which consists of trades in options or futures or more complex contracts, between two people, without any exchange being in the picture. In this sense, it is a little odd to say "OTC" and "Exchange" in the same sentence.
In India, we can think of the role of OTC as being that of trying to create liquidity for relatively illiquid stocks. I think that is the most useful way to define the objective of OTCEI: to find techniques of making smallcap stocks more liquid than would be the case on the other major exchanges.
SEBI Survey
According to SEBI's recent survey, 60 per cent of trading the volumes still come from just three cities - Mumbai, New Delhi and Kolkata.
For example, the Mumbai region's share in the total traded volume of National Stock Exchange is 40 per cent. New Delhi comes next with 10.14 per cent and Kolkata with 7.59 per cent. In the case of Bombay Stock Exchange, Mumbai contributes 23.44 per cent. Ahmedabad is next with 1.05 per cent.
Sebi said despite growth, hardly 3-4 per cent of the population is interested in the equity markets. Even in the case of the primary market, 90 per cent of initial public offer applications come from only 10 cities, according to a Sebi official.
The spread of depository participants is an indication of the lack of a uniform equity cult. About 85-90 per cent of the DPs of both the depositories - National Securities Depository Ltd and Central Depository Services Ltd - are located in only 10 cities. NSDL has 803 DPs, out of which 688 are in 10 cities while CDSL has 740, of which 650 are in 10 cities, according to the Sebi annual report.
The report, however, says trading volumes went up by 76.7 per cent between 2005-06 and 2007-08. BSE and NSE together contributed more than 99 per cent of the turnover.
Sebi also quoted the World Federation of Exchanges to say that BSE and NSE had augmented their position in the world market. In terms of the number of trades in equity shares, NSE ranked third and BSE sixth.
For example, the Mumbai region's share in the total traded volume of National Stock Exchange is 40 per cent. New Delhi comes next with 10.14 per cent and Kolkata with 7.59 per cent. In the case of Bombay Stock Exchange, Mumbai contributes 23.44 per cent. Ahmedabad is next with 1.05 per cent.
Sebi said despite growth, hardly 3-4 per cent of the population is interested in the equity markets. Even in the case of the primary market, 90 per cent of initial public offer applications come from only 10 cities, according to a Sebi official.
The spread of depository participants is an indication of the lack of a uniform equity cult. About 85-90 per cent of the DPs of both the depositories - National Securities Depository Ltd and Central Depository Services Ltd - are located in only 10 cities. NSDL has 803 DPs, out of which 688 are in 10 cities while CDSL has 740, of which 650 are in 10 cities, according to the Sebi annual report.
The report, however, says trading volumes went up by 76.7 per cent between 2005-06 and 2007-08. BSE and NSE together contributed more than 99 per cent of the turnover.
Sebi also quoted the World Federation of Exchanges to say that BSE and NSE had augmented their position in the world market. In terms of the number of trades in equity shares, NSE ranked third and BSE sixth.
PM's Views on G20, Inflation & Present Condition
I consider Mr. Manmohan Singh as my idol. Not because he is present Prime Minister or former Finance Minister or former RBI governor. But because of his economist stature over PM (or FM), handling the worst situation of 1991 & 92 & so on. I always read any news regarding him or his speeches or his interviews. Even I posted his speech what he gave after the vote of confidence in the parliament. So here is another interview with press in his special plane while coming back from G20 summit, have a look at it.
You had predicted that growth rate would be impacted...
Well, I don't take credit, but Finance Minister, Mr (P) Chidambaram, and I had anticipated that there is likely to be a global slowdown this year. Therefore, in preparing for the Budget for the current year, we budgeted for a very substantial amount of deficit, precisely to take care of the slack that may emerge.
So as far as our economy is concerned, I think, our fiscal stimulus is already on. The fact that we have given record prices to the producers of wheat and rice; that Rs 71,000 crores (Rs 710 billion) of loans have been written off, we have set in motion a very extensive programme for social service and infrastructure expansion.
So as far as India is concerned, fiscal stimulus is by and large already in place. We have already taken steps to provide more liquidity, and ready to provide even more, if required.
Is there anything else which is being given apart from what is already provided for? What is the next fiscal stimulus package that can be expected?
Well, I think this is not a once and for all process. We are keeping the situation under review on a day-to-day basis. The Reserve Bank of India [Get Quote] is at it, the finance ministry is at it... I'm heading a committee with the finance minister and Commerce Minister (Kamal Nath). So whatever is needed to keep the economy on an even keel will be done.
Fortunately inflation is now becoming less of a problem and if you look at the inflation from a different angle, it is de-seasonlized data.
The situation is turning out to be much better on the inflation front than is evident from this year-on-year figures. That will give us greater maneuverability to deal with the economic situation.
Should we be more proactive in cutting interest rates?
I think as far as interest rates are concerned, that is the preserve of the Reserve Bank of India. It would not be proper for me to comment on this but as I said this is an evolving situation, if inflation rate comes down, if we feel confident that inflation will not be a problem, there is scope for maneuverability, both in more aggressive use of monetary policy and more aggressive use of fiscal policy.
Is the global crisis a failure of capitalism as an ideology or a mistake
Well, financial capital certainly has shown weaknesses. There has been lack of supervision, there has been too much faith that self-interest will make people behave in an enlightened manner. So these are weaknesses of the system, the financial system regulation has been ineffective. But I don't believe that these are inherent in the system.
The Left is saying that they have saved the nation by not allowing the pension bill. Your comment please.
But what has that got to do with this. Even if the pension bill was not there, I don't see the world situation would have been different. We are a small player. Global meltdown is not a crisis which is the result of wrong policies of the Government of India. It is a crisis made outside India. We are the victims of it, not the cause.
Oil prices have come down. Do you intend to respond?
Well we will look at all the options. We have still a considerable deficit on the oil account. This is as I said an evolving situation.
Was there consensus on your point on protectionism?
Yes there is a general agreement that protectionism would be a wrong response to the present situation. It would only accentuate the crisis. Such 'beggar thy neighbor policies' have never worked in the past. They only slowdown and lead to decline of economic activity all around. There is in the communique, I think, a reaffirmation that all countries will resist a recourse to protectionist tendencies.
Would there be an impact on the Doha round of WTO talks?
Yes. A part of the same communique states that this gives urgency to the task of completing the Doha round as early as possible.
Your comments on the capital account convertibility and banking review as stated in your speech at RBI in 2006
When I went to the Reserve Bank some two years ago, I had said that the whole issue of capital account convertibility needs to be relooked at. There was a Tarapore Committee Report, so I suggested that maybe Tarapore should be asked to relook and revisit it. I did not pronounce anything about if we were going to have capital account convertibility or when. It was a suggestion and Reserve Bank followed it up. And that report is a public document.
What about banking sector review?
This is a question about FDI (foreign direct investment) in banking- (indicates to FM)...
Finance minister: The notification was made towards the end of the NDA Government in January-February 2004. All that we said was that since the notification has been made, we will allow foreign capital in private-sector banks. If any Indian investor wants to buy shares in a private-sector bank, he is subject to a voting cap. As long as there is a voting cap new capital will not come into a private-sector bank. We plan to remove the voting cap.
That amendment (reviewing the voting cap) had been introduced in the parliament. Whether it is foreign capital or Indian capital into a private-sector bank, as long as this cap is there no capital is going to come.
Is the government satisfied with the way it has handled the situation (financial crisis)? Will the people of this country vote the government back?
Well, I think we have done reasonably well and I sincerely hope that the people of India would repose their confidence in us.
When would this crisis get over?
I am not an astrologer. I think there are apprehensions that we haven't seen the worst of the crisis. There are conflicting viewpoints. Our efforts must be to contain and rollback the crisis. But how long will it take, I am afraid, I cannot pronounce with any sense of authority.
Are there any apprehensions in India about Obama regime?
No, no. From whatever feedback I have, I think we have no reason to be apprehensive about the change of regime in the United States. There is general recognition in the US regarding the role that India can play, ...India should play. There is considerable appreiciation of the way Indian economy is managed. And more recently, also Obama did send Madeleine Albright and former Congressman Leach to interact with us. They have given us all the positive indication, so there is no reason to have any doubts about the intentions of the Obama administration towards India.
Your response to the approaching elections and the crisis...
Well, as I said the crisis is not our making. What I would like is for the people of India to judge us by the response of our government to this crisis. We acted in time, and while the rest of the world is in doom and gloom, we will still maintain a growth rate of 7.5 per cent. Growth with stability, more socially inclusive growth is a reality and will remain a reality despite the onslaught of the adverse turn in our external environment.
Will the crisis postpone or hasten elections?
It has no bearing on the elections. Elections will be held on schedule.
What has been to IMF's role, as far as the crisis is concerned?
It has been endorsed that more resources should be provided to the International Monetary Fund and the World Bank. At the meeting itself, the Japanese government announced a loan of hundred billion dollars to the IMF. So on the whole I think, the climate in the developed world is to recognise that international institutions need extra resources if they are to come to the rescue of the emerging countries and other developing countries.
You had predicted that growth rate would be impacted...
Well, I don't take credit, but Finance Minister, Mr (P) Chidambaram, and I had anticipated that there is likely to be a global slowdown this year. Therefore, in preparing for the Budget for the current year, we budgeted for a very substantial amount of deficit, precisely to take care of the slack that may emerge.
So as far as our economy is concerned, I think, our fiscal stimulus is already on. The fact that we have given record prices to the producers of wheat and rice; that Rs 71,000 crores (Rs 710 billion) of loans have been written off, we have set in motion a very extensive programme for social service and infrastructure expansion.
So as far as India is concerned, fiscal stimulus is by and large already in place. We have already taken steps to provide more liquidity, and ready to provide even more, if required.
Is there anything else which is being given apart from what is already provided for? What is the next fiscal stimulus package that can be expected?
Well, I think this is not a once and for all process. We are keeping the situation under review on a day-to-day basis. The Reserve Bank of India [Get Quote] is at it, the finance ministry is at it... I'm heading a committee with the finance minister and Commerce Minister (Kamal Nath). So whatever is needed to keep the economy on an even keel will be done.
Fortunately inflation is now becoming less of a problem and if you look at the inflation from a different angle, it is de-seasonlized data.
The situation is turning out to be much better on the inflation front than is evident from this year-on-year figures. That will give us greater maneuverability to deal with the economic situation.
Should we be more proactive in cutting interest rates?
I think as far as interest rates are concerned, that is the preserve of the Reserve Bank of India. It would not be proper for me to comment on this but as I said this is an evolving situation, if inflation rate comes down, if we feel confident that inflation will not be a problem, there is scope for maneuverability, both in more aggressive use of monetary policy and more aggressive use of fiscal policy.
Is the global crisis a failure of capitalism as an ideology or a mistake
Well, financial capital certainly has shown weaknesses. There has been lack of supervision, there has been too much faith that self-interest will make people behave in an enlightened manner. So these are weaknesses of the system, the financial system regulation has been ineffective. But I don't believe that these are inherent in the system.
The Left is saying that they have saved the nation by not allowing the pension bill. Your comment please.
But what has that got to do with this. Even if the pension bill was not there, I don't see the world situation would have been different. We are a small player. Global meltdown is not a crisis which is the result of wrong policies of the Government of India. It is a crisis made outside India. We are the victims of it, not the cause.
Oil prices have come down. Do you intend to respond?
Well we will look at all the options. We have still a considerable deficit on the oil account. This is as I said an evolving situation.
Was there consensus on your point on protectionism?
Yes there is a general agreement that protectionism would be a wrong response to the present situation. It would only accentuate the crisis. Such 'beggar thy neighbor policies' have never worked in the past. They only slowdown and lead to decline of economic activity all around. There is in the communique, I think, a reaffirmation that all countries will resist a recourse to protectionist tendencies.
Would there be an impact on the Doha round of WTO talks?
Yes. A part of the same communique states that this gives urgency to the task of completing the Doha round as early as possible.
Your comments on the capital account convertibility and banking review as stated in your speech at RBI in 2006
When I went to the Reserve Bank some two years ago, I had said that the whole issue of capital account convertibility needs to be relooked at. There was a Tarapore Committee Report, so I suggested that maybe Tarapore should be asked to relook and revisit it. I did not pronounce anything about if we were going to have capital account convertibility or when. It was a suggestion and Reserve Bank followed it up. And that report is a public document.
What about banking sector review?
This is a question about FDI (foreign direct investment) in banking- (indicates to FM)...
Finance minister: The notification was made towards the end of the NDA Government in January-February 2004. All that we said was that since the notification has been made, we will allow foreign capital in private-sector banks. If any Indian investor wants to buy shares in a private-sector bank, he is subject to a voting cap. As long as there is a voting cap new capital will not come into a private-sector bank. We plan to remove the voting cap.
That amendment (reviewing the voting cap) had been introduced in the parliament. Whether it is foreign capital or Indian capital into a private-sector bank, as long as this cap is there no capital is going to come.
Is the government satisfied with the way it has handled the situation (financial crisis)? Will the people of this country vote the government back?
Well, I think we have done reasonably well and I sincerely hope that the people of India would repose their confidence in us.
When would this crisis get over?
I am not an astrologer. I think there are apprehensions that we haven't seen the worst of the crisis. There are conflicting viewpoints. Our efforts must be to contain and rollback the crisis. But how long will it take, I am afraid, I cannot pronounce with any sense of authority.
Are there any apprehensions in India about Obama regime?
No, no. From whatever feedback I have, I think we have no reason to be apprehensive about the change of regime in the United States. There is general recognition in the US regarding the role that India can play, ...India should play. There is considerable appreiciation of the way Indian economy is managed. And more recently, also Obama did send Madeleine Albright and former Congressman Leach to interact with us. They have given us all the positive indication, so there is no reason to have any doubts about the intentions of the Obama administration towards India.
Your response to the approaching elections and the crisis...
Well, as I said the crisis is not our making. What I would like is for the people of India to judge us by the response of our government to this crisis. We acted in time, and while the rest of the world is in doom and gloom, we will still maintain a growth rate of 7.5 per cent. Growth with stability, more socially inclusive growth is a reality and will remain a reality despite the onslaught of the adverse turn in our external environment.
Will the crisis postpone or hasten elections?
It has no bearing on the elections. Elections will be held on schedule.
What has been to IMF's role, as far as the crisis is concerned?
It has been endorsed that more resources should be provided to the International Monetary Fund and the World Bank. At the meeting itself, the Japanese government announced a loan of hundred billion dollars to the IMF. So on the whole I think, the climate in the developed world is to recognise that international institutions need extra resources if they are to come to the rescue of the emerging countries and other developing countries.
Sunday, November 16, 2008
Oil Investments
Today Auxi sent me this article. I thought of sharing this article with you guys...
Oil Investments
Today daily here said, people in Gulf aren't affected by Global Financial Turmoil, in terms job cuts and losses amid the fear in Europe & US. The Gulf Countries are rich in Petrodollars. However, the fall in Oil Price creating a bit frustration among them. Below are the break-even oil prices for these Oil Rich Countries.
1) Saudi - $49
2) UAE - $23
3 Qatar - $24
4) Kuwait - $33
Any single penny more than the above petrodollar is explicitly goes as surplus to their budget. Imagine, the profit when a barrel was $147 in beginning of this year. Now the Gulf are struck with grief for falling oil price (US the #1 Oil Cosumer, consuming less). They OPEC has cut oil production 1.7 Billion barrel per day and further having a urgent meeting today for more production cut. They want create more demand and thus to make oil price to be between $70 to $90 per barrel.
British Prime Minister - Mr.Gordon Brown visited Qatar couple of weeks before for its investment in UK, Qatar is buying some of the assets in Bankrupted - Barclay's Bank. Our Indian Prime Minster was here for investment invitation.
Apart from all, Gulf is fishing in trouble water and adapting the policy "of someone loss in someone's profit". GCC sovereign funds are investing in real estates in the UK & US to buy at fallen price.
It is the right time for people with excess money to invest in Petrochemical industries and buy fallen shares on long term perspective and patiently wait to taste your investment fruit to ripe.
Oil Investments
Today daily here said, people in Gulf aren't affected by Global Financial Turmoil, in terms job cuts and losses amid the fear in Europe & US. The Gulf Countries are rich in Petrodollars. However, the fall in Oil Price creating a bit frustration among them. Below are the break-even oil prices for these Oil Rich Countries.
1) Saudi - $49
2) UAE - $23
3 Qatar - $24
4) Kuwait - $33
Any single penny more than the above petrodollar is explicitly goes as surplus to their budget. Imagine, the profit when a barrel was $147 in beginning of this year. Now the Gulf are struck with grief for falling oil price (US the #1 Oil Cosumer, consuming less). They OPEC has cut oil production 1.7 Billion barrel per day and further having a urgent meeting today for more production cut. They want create more demand and thus to make oil price to be between $70 to $90 per barrel.
British Prime Minister - Mr.Gordon Brown visited Qatar couple of weeks before for its investment in UK, Qatar is buying some of the assets in Bankrupted - Barclay's Bank. Our Indian Prime Minster was here for investment invitation.
Apart from all, Gulf is fishing in trouble water and adapting the policy "of someone loss in someone's profit". GCC sovereign funds are investing in real estates in the UK & US to buy at fallen price.
It is the right time for people with excess money to invest in Petrochemical industries and buy fallen shares on long term perspective and patiently wait to taste your investment fruit to ripe.
Saturday, November 15, 2008
MoM Inflation
Guys I am posting about inflation again, please bear with me. While discussing in one of our class I told my friends that India is facing the imported inflation. That means majority of our inflation is imported in the form of oil as we import almost 70% of our oil requirements.
The best proof for that argument is this week’s inflation numbers, which reduced to 8.98% from 10.72%. Steepest fall of 1.72%, which is because of Naphtha (33% down) & Jet aviation fuel (18% down). And still petrol, diesel and gas rates are not reduced by the central governments. Center wants the state owned oil companies to recover the losses which amounts to almost Rs. 140000 crore. If those prices are reduced then again inflation will come down & may be within the RBI’s standard before its expectation. And looking at political angle, central government may want to cash in the cut in the prices just before the elections say in February or March. Till that time both the purpose will be solved like recover of loss & political gain. One more problem they are facing is great extent of rupee depreciation from its peak levels 38-39 to above 50 levels so for same amount of crude, India needs to pay nearly 10-12 $ more.
Now coming to today’s topic, I want to congratulate the central government for deciding to come up with month on month inflation numbers rather than existing year on year!
In this existing condition, actual price variation in the market may not be clearly visible as it is always compared with the base week of the previous year. Means even if in the market prices may be decreasing but if in previous year’s inflation increased from its last week then inflation numbers what we get now may not be decreasing in real term and vice versa. This is what I discussed with many of my friend’s earlier and I think once I posted also.
But now government is thinking about month on month inflation numbers. Here we will get almost accurate numbers in accord with the market price movements. Here inflation numbers which will be released will be compared with last month’s inflation numbers which will indicate the most recent trend in the inflation numbers. Of course in the process of changing from YoY to MoM they may face some problems like whether to take average of the whole month or that particular week in the previous month!!!
Now looking at the world economic condition, RBI needs to think one more round of interest rate cut in near future if not immediately. Since there is fear of DEFLATION and it will be there in all recession/depression times. Since almost all major economies like EUROJONE (first time since its formation), UK (Its interest is lower than the Euro first time since Euro formation), US (FED rate is 1%), GERMANY (Interest rate 3.19%) & ITALY (3.75% interest rate) are about to enter or already in recession. So to boost the domestic sentiments RBI needs to think of REPO RATE & CRR.
The best proof for that argument is this week’s inflation numbers, which reduced to 8.98% from 10.72%. Steepest fall of 1.72%, which is because of Naphtha (33% down) & Jet aviation fuel (18% down). And still petrol, diesel and gas rates are not reduced by the central governments. Center wants the state owned oil companies to recover the losses which amounts to almost Rs. 140000 crore. If those prices are reduced then again inflation will come down & may be within the RBI’s standard before its expectation. And looking at political angle, central government may want to cash in the cut in the prices just before the elections say in February or March. Till that time both the purpose will be solved like recover of loss & political gain. One more problem they are facing is great extent of rupee depreciation from its peak levels 38-39 to above 50 levels so for same amount of crude, India needs to pay nearly 10-12 $ more.
Now coming to today’s topic, I want to congratulate the central government for deciding to come up with month on month inflation numbers rather than existing year on year!
In this existing condition, actual price variation in the market may not be clearly visible as it is always compared with the base week of the previous year. Means even if in the market prices may be decreasing but if in previous year’s inflation increased from its last week then inflation numbers what we get now may not be decreasing in real term and vice versa. This is what I discussed with many of my friend’s earlier and I think once I posted also.
But now government is thinking about month on month inflation numbers. Here we will get almost accurate numbers in accord with the market price movements. Here inflation numbers which will be released will be compared with last month’s inflation numbers which will indicate the most recent trend in the inflation numbers. Of course in the process of changing from YoY to MoM they may face some problems like whether to take average of the whole month or that particular week in the previous month!!!
Now looking at the world economic condition, RBI needs to think one more round of interest rate cut in near future if not immediately. Since there is fear of DEFLATION and it will be there in all recession/depression times. Since almost all major economies like EUROJONE (first time since its formation), UK (Its interest is lower than the Euro first time since Euro formation), US (FED rate is 1%), GERMANY (Interest rate 3.19%) & ITALY (3.75% interest rate) are about to enter or already in recession. So to boost the domestic sentiments RBI needs to think of REPO RATE & CRR.
Thursday, November 13, 2008
Updates…
So guys, as I posted yesterday about boosting our moral here is the some news which may be cheerful for us as management graduates and for country’s economy.
Inflation plunges to 8.98% as compared to 10.72%
Inflation for the week-ended November 1 has reached single-digit and come in at 8.98% compared with 10.72% the week earlier. The rate came down by 1.74% points from 10.72 per cent in the previous week.
The main reasons for inflation to come down so drastically are Naptha & Aviation fuel.
Internals ---> % week-on-week
Manufacturing WPI ---> Down 0.7
Fuel and power ---> Down 3.4
Naphtha ---> Down 33
Aviation turbine fuel price ---> Down 18
September IIP (Index Industrial Production) up @ 4.8% as compared to 1.3% of August
The September IIP, or index industrial production, has come in at 4.8% up from 1.3% during August and 6.98% year-on-year.
The manufacturing output is up at 4.8% compared to 7.45% year-on-year. The capital goods output is up at 18.8% against 20.9%; mining output is up at 5.7% against 4.9%.
The consumer durable output is up 13.1% compared to a fall of 7.3% year-on-year. The August industrial output is revised to 1.4% from 1.3%, on provisional basis
P Chidambaram, Finance Minister, said September IIP numbers are encouraging and growth in capital goods sector has been impressive and satisfactory. However, data collection must be improved and made more relevant, he added.
Oil plunges to 22-month low of $55 a barrel
Oil fell for a third straight day on Thursday to hit a 22-month low of $55 a barrel as there fear of recession in world economy.
US light crude for December delivery was down 81 cents at $55.35 a barrel by 0259 GMT, after having fallen earlier to $55.03 -- the lowest since Jan. 29, 2007. London Brent crude fell 41 cents to $51.96 in early Asian trade. "Oil prices continue to be pressured by fears that weaker international economic growth will depress oil consumption," said David Moore, an analyst at the Commonwealth Bank of Australia.
Oil fell 5% overnight, along with a big drop in US stock markets, after the US government shifted its position on how it planned to use its $700 billion bailout fund, which added uncertainty to financial markets and renewed fears of a protracted global recession.
Oil has lost about $91, or 62%, from its record high of above $147 struck in mid-July, on growing evidence that recent high energy prices and the financial crisis have dented energy demand in the United States and other industrialized nations.
Demand in the United States, the world's biggest consumer of oil, was expected to fall by more than 1 million barrels per day (bpd) for the first time since 1980 this year, the EIA said. The EIA also forecast world oil demand to rise by only just 100,000 bpd in 2008 and will be virtually flat in 2009, as it cut its 2009 oil price forecast to average around $63.50 a barrel.
Resources…
Moneycontrol.com
Rediffmail.com
TOI
Inflation plunges to 8.98% as compared to 10.72%
Inflation for the week-ended November 1 has reached single-digit and come in at 8.98% compared with 10.72% the week earlier. The rate came down by 1.74% points from 10.72 per cent in the previous week.
The main reasons for inflation to come down so drastically are Naptha & Aviation fuel.
Internals ---> % week-on-week
Manufacturing WPI ---> Down 0.7
Fuel and power ---> Down 3.4
Naphtha ---> Down 33
Aviation turbine fuel price ---> Down 18
September IIP (Index Industrial Production) up @ 4.8% as compared to 1.3% of August
The September IIP, or index industrial production, has come in at 4.8% up from 1.3% during August and 6.98% year-on-year.
The manufacturing output is up at 4.8% compared to 7.45% year-on-year. The capital goods output is up at 18.8% against 20.9%; mining output is up at 5.7% against 4.9%.
The consumer durable output is up 13.1% compared to a fall of 7.3% year-on-year. The August industrial output is revised to 1.4% from 1.3%, on provisional basis
P Chidambaram, Finance Minister, said September IIP numbers are encouraging and growth in capital goods sector has been impressive and satisfactory. However, data collection must be improved and made more relevant, he added.
Oil plunges to 22-month low of $55 a barrel
Oil fell for a third straight day on Thursday to hit a 22-month low of $55 a barrel as there fear of recession in world economy.
US light crude for December delivery was down 81 cents at $55.35 a barrel by 0259 GMT, after having fallen earlier to $55.03 -- the lowest since Jan. 29, 2007. London Brent crude fell 41 cents to $51.96 in early Asian trade. "Oil prices continue to be pressured by fears that weaker international economic growth will depress oil consumption," said David Moore, an analyst at the Commonwealth Bank of Australia.
Oil fell 5% overnight, along with a big drop in US stock markets, after the US government shifted its position on how it planned to use its $700 billion bailout fund, which added uncertainty to financial markets and renewed fears of a protracted global recession.
Oil has lost about $91, or 62%, from its record high of above $147 struck in mid-July, on growing evidence that recent high energy prices and the financial crisis have dented energy demand in the United States and other industrialized nations.
Demand in the United States, the world's biggest consumer of oil, was expected to fall by more than 1 million barrels per day (bpd) for the first time since 1980 this year, the EIA said. The EIA also forecast world oil demand to rise by only just 100,000 bpd in 2008 and will be virtually flat in 2009, as it cut its 2009 oil price forecast to average around $63.50 a barrel.
Resources…
Moneycontrol.com
Rediffmail.com
TOI
Letter to my friends…
Hi guys, how are you? I hope all are doing well. Today I thought of posting something different other than usual financial stuff.
I don’t know how many of my college mates read my blog, but whoever reads my blog, I want to approach all of them through my blog. Guys all of you know that what is the current market situation. According to me this the worst situation India is facing even as compared to THE GREAT DEPRESSION in 1930s. Since at that time first of all India was under British rule and secondly, globalization wasn’t so much. So whatever happens in the other part of the world may not have affected the other parts as of now. Where as now, every country is integral part of the world. If something happens to US or India or China it is going affect other country. Since Big Brother (US) is in deep trouble and as an integral part, all of us are also in trouble.
So in this placement time, we all are facing the heat of situation. Companies are laying off heavily to cut the cost, almost financial services industries like brokerage and mutual fund companies stopped recruitments & so on. Number of companies coming to campus has reduced drastically. Even though some companies are recruiting from campuses but they have become very choosy and cost concerned in terms of package!
So some where deep down in our hearts we are all fearful, depressed and started loosing the motivation. Once if we get into depressed state then it will become much more difficult get placed ourselves.
But guys don’t loose your hope! I know giving lecture like this very easy as compared to practically facing the rejection! I have also faced rejection many times. But every situation like this gives an opportunity for the people like us. Try all your resources. This is not the time to hesitate to ask help from your resources. Help the placement team to help you guys and others also. Give the valuable leads to them if you have any. Check with your SIP companies and keep in touch with them. Still many banks (HDFC, Syndicate, Axis & many others), insurance companies (ICICI prudential), FMCG companies, Hospitality sector, IT/ITES and many other sector companies are recruiting. If you have any contact in them use them. Ask your friends if anybody working their not only for your sake but for other specialization friends also. Like your friends may be in IT companies and your specialization may be finance, so ask them for IT+MBA profile and halp IT people and so on. This is the time to implement whatever we learnt about team work, management and so on. This is the time for actual transition from management students to stress handling managers. Each one of your console & motivate your friend whenever he faces the rejection from any company.
Never loose hope!!!
I don’t know how many of my college mates read my blog, but whoever reads my blog, I want to approach all of them through my blog. Guys all of you know that what is the current market situation. According to me this the worst situation India is facing even as compared to THE GREAT DEPRESSION in 1930s. Since at that time first of all India was under British rule and secondly, globalization wasn’t so much. So whatever happens in the other part of the world may not have affected the other parts as of now. Where as now, every country is integral part of the world. If something happens to US or India or China it is going affect other country. Since Big Brother (US) is in deep trouble and as an integral part, all of us are also in trouble.
So in this placement time, we all are facing the heat of situation. Companies are laying off heavily to cut the cost, almost financial services industries like brokerage and mutual fund companies stopped recruitments & so on. Number of companies coming to campus has reduced drastically. Even though some companies are recruiting from campuses but they have become very choosy and cost concerned in terms of package!
So some where deep down in our hearts we are all fearful, depressed and started loosing the motivation. Once if we get into depressed state then it will become much more difficult get placed ourselves.
But guys don’t loose your hope! I know giving lecture like this very easy as compared to practically facing the rejection! I have also faced rejection many times. But every situation like this gives an opportunity for the people like us. Try all your resources. This is not the time to hesitate to ask help from your resources. Help the placement team to help you guys and others also. Give the valuable leads to them if you have any. Check with your SIP companies and keep in touch with them. Still many banks (HDFC, Syndicate, Axis & many others), insurance companies (ICICI prudential), FMCG companies, Hospitality sector, IT/ITES and many other sector companies are recruiting. If you have any contact in them use them. Ask your friends if anybody working their not only for your sake but for other specialization friends also. Like your friends may be in IT companies and your specialization may be finance, so ask them for IT+MBA profile and halp IT people and so on. This is the time to implement whatever we learnt about team work, management and so on. This is the time for actual transition from management students to stress handling managers. Each one of your console & motivate your friend whenever he faces the rejection from any company.
Never loose hope!!!
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